Bank of England Delivers a Dovish Hike, GBP/USD Reacts Lower
BoE Dovish Hike
The Bank of England (BoE) delivered its third rate hike in a row, raising them by 25 basis points, to 0.75%. The decision was not unanimous, since out of the nine members of the Monetary Policy Committee (MPC), one of them dissented in favor of no change.[1]
In the previous meeting in February when the bank had again hiked by 25 basis points, there were four dissenters, but they had all voted in favor of a larger half-percentage increase. [2]
Furthermore, the Committee judged that some further modest tightening in monetary policy "may be appropriate" in the coming months, marking a dovish shift from last month's "is likely to be appropriate" reference.
Higher Inflation
The main driver for the bank's tightening, is surging inflation, which climbed 5.5% year-over-year in January, well above the bank's 2% target, with next update expect in the following week. Of particular concern for the bank, has been wage inflation, with average weekly earnings having risen 4.8% 3m/y in the November-January period, from 4.3% prior, based on this week's data.
The war in Ukraine, western sanctions against Russia and the surge in energy and commodity prices put upwards pressure in inflation. Back in February and before these events unfolded, the bank had projected that inflation would peak at 7.25% in April. Today however, it upgraded its forecasts and sees Inflation rising to around 8% in 2022 Q2, and perhaps even higher later this year.
US Fed
Yesterday, the US Federal Reserve increased its interest rates for the first time since 2018 [3], with its members seeing up to six more moves within the year [4], which would mean adjustment potentially in every of the remaining meetings.
Combating high prices is the Fed's top priority, with the policy statement noting that the implications of the situation in Ukraine for the US Economy are "highly uncertain", and that they "are likely to create additional upward pressure on inflation and weigh on economic activity" in the near term.
GBP/USD
The pair had risen yesterday after the Fed decision, since the lift-off had been well telegraphed, having started today with upbeat mood. The dovish hike by the Bank of England however, pushes the British Pound to negative territory.
Nikos Tzabouras
Senior Market Specialist
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
References
| Retrieved 17 Mar 2022 https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2022/march-2022 | |
| Retrieved 17 Mar 2022 https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2022/february-2022 | |
| Retrieved 17 Mar 2022 https://www.federalreserve.gov/monetarypolicy/files/monetary20220316a1.pdf | |
| Retrieved 01 Jul 2022 https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220316.pdf |
Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.