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Pound Drifts following BoE Rate Hike

Pound Drifts following BoE Rate Hike

The Bank Of England raises interest rates by 0.5% to 1.75%, the biggest rise in 25 years, as it predicts an even higher peak in inflation of 13%. Bank predicts a recession starting this year lasting as long as the financial crisis (5 quarters), as deep as the 1990s. 

 

EUR / USD

The Euro was held just above 1.0150 against the dollar ahead of Thursday’s New York open while there was resistance around 1.0200 as markets mulled the outlook for global economies and interest rates.

There were still reservations over the impact of very high gas prices within the Euro-Zone, especially as pressures intensify ahead of the winter period which will pose important risks to the outlook.

The latest employment report will be released at lunchtime today with expectations of an increase in non-farm payrolls of around 250,000 with the unemployment rate steady at 3.6%. The overall data, including average earnings, will be important for evidence surrounding underlying growth and inflation trends in the economy.

 

GBP / USD

The BoE raised interest rates by 50 basis points to 1.75% which was in line with consensus forecasts and the highest level since late 2008. There was an 8-1 vote with Tenreyro voting for a smaller increase to 1.50%. The bank raised its inflation forecast with a peak now seen above 13% late this year due to the surge in retail energy prices. The bank also downgraded its economic forecasts with GDP seen contracting in 2023 and 2024 with five quarters of negative growth as real disposable incomes are set to decline by the largest amount since records began 1964. Forecasts could, however, be adjusted if there is a strong fiscal stimulus. The bank noted that uncertainty was exceptionally high and moved away from predictive forward guidance while reiterating that it would take forceful action if needed. The bank forecast that, based on market rates, inflation would be well below target on a 3-year horizon which implied that it considers market expectations are too high. 

Bailey stated that all options were open for the September policy meeting. The downbeat forecasts for the economy were also important in underlying sentiment and GBP declined sharply with lows around 1.2070 against the USD before a recovery to 1.2150 as the US currency slipped while the Euro rallied to 0.8425. There was little change on opening today with GBP just below 1.2150 against the USD. Markets will keep a very close eye on comments from the central bank throughout the day.

 

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