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BoE likely to follow Fed with 25bp hike

Fawad Razaqzada Fawad Razaqzada 17/03/2022
BoE likely to follow Fed with 25bp hike BoE likely to follow Fed with 25bp hike
BoE likely to follow Fed with 25bp hike Fawad Razaqzada
Following yesterday’s rate hike by the US Federal Reserve, it is the Bank of England’s turn to tighten its policy. The global economy faces elevated levels of inflation because of various factors, including from surging energy and commodity prices. While the Fed has just started its hiking cycle, the BoE is well on the way, having raised interest rates in its previous two meetings by 25 basis points each time. Another 0.25% hike is expected today, and the decision is likely to be unanimous.
 
If the above expectations are met, the pound should be able to regain further ground against the dollar, after the greenback fell in reaction to the Fed’s hike last night. The weakness in the dollar observed since last night’s Fed hike suggests the market had already priced in the rate hike and the Fed’s projection of 6 more hikes for this year.

The Bank of England announcement is due at 1200 GMT.

Given the Ukraine situation, I highly doubt the BoE is going to go for a 50 basis point hike at this meeting. It will be interesting to see how much the BoE will push back against expectation of over 6 rate hikes priced in for this year. Just like the Fed, the BoE will be keen to frontload rate hikes to address surging inflation, but then become more concerned in the latter parts of this year about the projection of economic growth. If inflation falls back later on in the year, there won’t be any need to hike rates by 6 or 7 times by year-end as the market is currently expecting.

GBP/USDSource: ThinkMarkets and TradingView.com

Ahead of the BoE decision, the GBP/USD has rebounded strongly from the psychologically-important 1.30 handle over the last few days. It has risen to rest the next potential resistance zone between 1.3160 (last year’s low) and 1.3190. A decisive break above this zone would tip the balance back in the bulls’ favour, potentially leading to a sharp continuation towards 1.3350. However, if the 1.3160-1.3190 resistance area holds firm, then a revisit of 1.30 cannot be ruled out. This may happen if the BoE is surprisingly more dovish than expected, although it is not my base case scenario.

 
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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