The BOE will be the latest central bank to declare a rate hike this month, with expectations it will follow the ECB and Fed’s lead with little change. Last week, the ECB and Fed both raised interest rates by 25 basis points, but implied that further rate hikes will depend heavily on upcoming data and developments. ECB bias is for continued hikes, Fed pause likely; but both have left their doors wide open despite this being the culmination of a cycle of rising rates.
On the other hand, the UK faces persistently high inflation and does not seem to have the advantages to imply it is at terminal levels. Recent reports show inflation in double digits, while the BOE predicts that it will drop precipitously over the last quarter. BOE is considered late and slow in raising interest rates, so that high inflation is still maintained today.
When it comes to rate hikes, attention is likely to be on the vote share. Two MPC members, Tenreyo and Dhingra, routinely oppose rate hikes, saying tackling the economy must come first. So it is estimated that the increase in interest rates this time will need to be more careful, which could have an impact on pressure on Sterling. Except that the BOE reiterated more policy action is needed to calm markets. The price growth outlook forecast is likely to be updated which will not change market expectations yet, unless Bailey surprises with extra hawkish levels.
The BOE’s tightening has exacerbated the cost-of-living crisis and policymakers are seeking relief by ending the current rate-tightening cycle with a final rate hike on Thursday or possibly at their next meeting in June.
The Pound has risen 1.87% against the Euro in 2023, with an increase of 4.40% against the USD. In fact, it has risen against all G10 currencies this year. Several financial institutions have predicted previously that the UK economy will fall into a recession that will last for up to two years, however, this now looks less likely. In fact, incoming survey data shows that economic revival has taken place in an environment of high inflation and interest rates.
Technical Review
GBPUSD, D1 – September rebound 1.0330 still maintaining the rally above 50% FR level (from 1.0330-1.4247 drawdown) this May. In yesterday’s trading, Cable managed to print a 13-month high price of 1.2678, 13 pips away from the high price in May 2022. In the last 3 trading days, the price of the GBPUSD pair was seen moving within a bound range in the doji candle format.
A move above the recent high will confirm that the corrective wave started from 1.0330 will not be completed and the short-term outlook will be bullish, with chances to test the 61.8% FR level around 1.2750. Meanwhile a move below the 1.2555 support will bring prospects of extended support at 1.2446 (Jan’23 high price which became support). If there is a move below 1.2446, Cable may continue its short-term downside bias to return to the 50% FR level (1.2288). Key support is seen at 1.1800.
In general, the price is still in a dominant bullish trend, staying above its 26-day EMA line, the positive RSI is yet to show overbought and the MACD is a bit dull in the buy zone.
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Ady Phangestu
Market Analyst – HF Educational Office – Indonesia
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