The British pound has posted slight gains ahead of today’s key Bank of England meeting. In the European session, GBP/USD is trading at 1.2167, up 0.17% on the day.
BoE expected to deliver 50bp salvo
The BoE will be in the spotlight, with the markets pricing a supersize 50bp rate hike at 90%. This will be a very significant move, as the central bank hasn’t raised rate by such an extent since 1995. Governor Bailey has been sounding hawkish and has pledged to do everything to curb soaring inflation. He hinted last week that the Bank could raise rates by 50bp, which would follow four straight increases of 25bp.
The BoE has looked timid compared to other major banks, with the Fed raising rates by 75bp at the last meeting and the Bank of Canada delivering a supersize 100bp increase. With inflation hitting 9.4% in June and no sign of a peak, the BoE has been accused of raising a white flag with regard to inflation. It sorely needs to establish credibility in its struggle to curb inflation, and a 50bp hike would certainly mollify some critics.
Although a 50bp is widely expected, the number of votes in favor of the move will be closely watched by investors. In June, the MPC voted 6-3 to raise rates by 25bp, suggesting that Thursday’s decision will not be unanimous either. If the majority wins six or more votes, it would send out a strong message that the BoE is prepared to continue hiking and another 50bp move would be a strong possibility in September, which would be bullish for the pound. A close 5-4 vote might result in less hawkish wording in its comments and would signal that we may be getting close to the end of the rate-tightening cycle and the pound could weaken.
There is a great deal of anticipation ahead of the meeting, and market participants should fasten their seat belts as we could see some volatility from the British pound today.
- GBP/USD faces resistance at 1.2295, followed by a monthly resistance line at 1.2362
- There is support at 1.2128 and 1.2061
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