Overview of the Bank of England rate decision
It’s not just the decision on the tax that will be important for the free pound…
Thursday’s Bank of England policy decision will come on the heels of the previous day’s FOMC meeting, which should mean a lot of forex consent for the pair GBP/USD. The Cable was able to rally strongly from all-time lows in recent weeks, while the EUR/GBP pair and other sterling pairs are also stabilizing, thanks to the lackluster political situation in the UK and the US. calmer tone in the financial markets in general. More Will the BoE’s rate decision favor a further decline in the pound?
Calmer political situation
The appointment of Rishi Sunak as the new UK Prime Minister after 45 days of disaster, Liz Truss’ tenure as Prime Minister has helped calm some of the investors’ nerves, the free and price of UK bonds is stabilizing that bit. Although the uncertainty is depressing, traders’ attention is only on politics and turns to the more macro themes affecting the broader financial markets.
The Bank of England faces another tough decision this week as it prepares to cut interest rates more sharply, to help manage inflation after the CPI rose above 10% in September on an annual basis. Analysts are attentive to the fact that the BoE is going down 75 basis points at this meeting, but it is clear that the Bank’s decision-makers are not moving forward with the level of reduction that I still had to assess, with rates which will peak just below 5% in 2023. A 75 basis point hike on Thursday took the rate from 2.25% to 3.00%, which would be the highest since those days the shadows of the financial crisis world.
How will sterling react to the Bank of England’s decision?
It’s not just the rate decision itself that will move the book on Thursday.
The distribution of votes, the language of the BoE, as well as growth and inflation discounts, will all have a say in how the currency reacts. In general, the more hawkish the BoE is on the expectation ratio, the more upside one should expect in the immediate response. The reverse is also true. For example, if the BoE dictates that the committee considers that several hikes in energy rates are justified to reduce inflation, it will be quite hawkish. On the other hand, if the BoE indicates greater concern about the economic crisis than inflation, this would imply a reduction in future rate hikes and a lower terminal rate, and therefore a negative response from the pound.
With that in mind, if the BoE decides to validate the market’s attentions and rise 75 basis points, it could send the free higher, leading the EUR/GBP pair to the 0.85 mark. The price of the pair could fall even lower if the BoE does not clearly indicate that it will be a one-time increase of 75 basis points.
A dovish surprise of a 50bps rise, in return, could initially send the pound lower, but if this is accompanied by a stronger hawkish message in terms of future rises, we may see a rebound. rapidly . Still, this potential move could see EUR/GBP rise to 0.8800, before deciding its next move.
As I mentioned, this is not the most important tax decision, but the central message on the path of the interest tax.
Why the BoE Couldn’t Deliver a Warmongering Surprise
There are a few reasons why the BoE could opt for a smaller hike at this meeting or provide a less hawkish signal on future decisions. The weaker PMI and growth numbers we have seen recently are, by definition, disinflationary. Moreover, the government’s reversal of the tax cuts means that it will have less fiscal stimulus than before. Fiscal risks are now less of a concern than before and the BoE would like to wait and see what the government comes up with in the deferred budget, rather than sending the wrong signals. Additionally, GBP/USD rebounded to ease concerns about importing higher inflation.
Clearly, the BoE will not want to overreact and then need to quickly undo the hikes when inflation and economic output fall. Given the context, I believe that the chances of a nice surprise are minimal, even if inflation remains above 10%.
EUR/GBP in focus ahead of BoE rate decision
With the FOMC rate decision taking place a day ahead of the BoE, it might be better for us to focus on EUR/GBP rather than GBP/USD, to see less reduced reaction from the sterling to the BoE’s decision. The price of the EUR/GBP pair is not far from testing the key support and the 200-day average around the 0.85 handle. This will likely happen if the BoE opts for 75 basis points, but as mentioned above, free will could then weaken again depending on the BoE’s use of language, etc. Key near-term resistance is seen around 0.8720 – a potential break above this level could allow for another wave of technical buying towards 0.90s in the days and weeks ahead.
By Fawad Razaqzada, FOREX.com » Official Site
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