GBP/USD – Eyes on BoE Rate Hike following strong UK CPI data
Today is an active day for GBP, with a focus on the BoE interest rate decision. Following yesterday’s shockingly high UK CPI reading, a solid justification exists for another raise from the BoE.
- It was a bullish Thursday, with GBP/USD increasing by 0.24% at $1.2293.
- Fed dovish hike in interest rates fails to satisfy bulls due to concerns of policy reversal and banking crisis.
- GBP/USD currency pair maintained its bullish momentum as traders waited for the Monetary Policy Summary from the BoE.
Dovish Fed added in the gains of GBP/USD
The Federal Reserve increased its benchmark funds rate by 25 basis points on Wednesday, raising it to 4.75% – 5.00%. However, it reduced its stance about continued rises while it analyzed how weak bank confidence is for the economy.
In a statement that followed the announcement on Wednesday, the FOMC also referred to the banking crisis this month. It noted that recent events might influence economic activity, hiring, and inflation and restrict credit conditions for households, businesses, and government agencies.
Fed Chair Jerome Powell emphasized that the FOMC completely focuses on returning inflation to its 2% benchmark. However, traders bet that the central bank’s terminal rate is near despite the Fed boosting interest rates as expected and repeating its vow to keep inflation under control, indicating some revival in the risk appetite of the market participants.
It is because the Fed raised interest rates while softening its stance on tightening monetary policy, indicating that it may soon be thinking about a stop to prevent more economic problems. It caused the dollar to drop to its lowest level in seven weeks. The Dollar Index (DXY) was down at 102.09. In the early trading hours on Thursday, the weak dollar led to a rise in the GBP/USD.
All eyes are on BoE Interest Rate decision
The Bank of England (BoE) had grounds to take a less hawkish monetary policy in light of the latest OBR economic forecasts. However, a sharp rise in UK inflation published on Wednesday has strengthened the case for the BoE to boost rates in a more hawkish approach.
Inflation in the UK came in at a hotter-than-anticipated 10.4% in February, considerably above the consensus estimate of a decline to 9.9% and suggesting that January’s drop to 10.1% appears to have been a momentary glitch.
The BoE strongly hinted after its most recent rate rise in February that rates were likely very near to a peak and that any additional adjustments would rely on what the data showed regarding inflationary pressures. Although there is a strong argument for another increase, probably, the Committee will once more be divided regardless of the direction of the policy due to the ongoing banking crisis.
According to the markets, the probability of a 25bp increase to 4.25% is above 80%.
GBP/USD traders will focus on the accompanying statement and the voting record of the MPC member to gain some guidance for the day, as the projected 25bp rate rise today will most likely have a subdued first impact on the GBP.