Trade Of The Week: Will BoE Join 75-bp Hike Club?

The war against inflation remains fierce and relentless.

Central banks across the world are on the offensive, unleashing aggressive rate hikes despite the growing risks of collateral damage to their respective economies.

Last week, the Bank of Canada (BoC) announced a smaller-than-expected hike of 50bp as recession fears intensified. However, the European Central Bank (ECB) hiked rates by 75 basis points for the second consecutive time thanks to soaring inflation in the Euro Area.

Over the next few days, the Federal Reserve is set to raise rates by 75 basis points for the fourth consecutive time while the Bank of England could finally join the jumbo hike club!

Before we take a deep dive into what to expect from the BoE on Thursday, it’s safe to say that the past few weeks have been wild for not only the UK economy but Pound. A toxic combination of political drama and central bank intervention sent the GBPUSD on a chaotic roller-coaster ride.

After making a swift recovery in recent days, the GBPUSD secured a weekly close above 1.1500 for the first time in 7 weeks. This move has been the product of dollar weakness and improving sentiment toward the UK economy after Rishi Sunak became Prime Minister. The currency pair will most likely be influenced by the Fed rate decision on Wednesday and the BoE meeting on Thursday.

The low down…

The Bank of England remains in a tricky position as it potentially delivers what would be the biggest UK rate hike in 33 years.

Sentiment towards the UK economy is fragile due to fears that the country is probably already in a recession while the recent political drama over ex-Prime Minister Liz Truss's controversial mini-budget has left a bitter aftertaste. With inflation hitting levels not seen in 40 years at 10.1%, expectations remain elevated over the Bank of England joining the heavy hitters by unleashing a 75bp hike. However, recent economic data including retail sales, monthly GDP, and manufacturing data among many others have shown signs of a slowing economy.

At the peak of the political crisis when the pound tumbled to an all-time low, markets were pricing in a gargantuan 200 basis point hike in November. But with some normality returning to UK markets and sterling staging a strong recovery, BoE rate hike expectations have cooled.

According to Bloomberg, traders have fully priced in a 75bp rate hike at the BoE’s November meeting but expectations could differ from reality.

Other things to watch out for…

Mid-week, the Federal Reserve is expected to raise interest rates by 75 basis points. Given how such a move has already been priced, much attention will be on the press conference for clues on future monetary policy. Should the central bank strike a cautious tone with doves entering the scene, this could weaken the dollar as aggressive rate hike bets cool. A weaker dollar may push the GBPUSD higher ahead of the BoE meeting on Thursday 3rd November.

Possible outcomes of BoE meeting

• BoE hikes rates by 75-basis points. This decision could inject some life into pound bulls but gains may be limited if the central bank signals that this is a “one-off” move. Expect the pound to weaken eventually as expectations rise over the BoE adopting a less aggressive approach towards rates beyond November and 2023.
• BoE hikes rate by 50-basis points. This decision could be based on the gloomy macroeconomic decisions and fears of the UK already entering a recession. Such a move could trigger a pound selloff as the BoE rejects the 75bp club membership.

Unlikely outcomes of BoE meeting

• BoE hikes rates by 100 basis points. Given how UK inflation remains at a 40-year high, the central bank decides to go full-auto to contain rising prices. Pound is likely to rally aggressively following such a move but the upside may be capped by recession fears.

GBPUSD to breakout or breakdown?

The next few days could be volatile for the GBPUSD thanks to the Fed & BoE policy meetings.

Fundamentally, the GBPUSD remains bearish but the technicals could be singing a different tune. Prices are trading above 1.1500 due to the recent weakness in the USD as traders bet over the Fed slowing the pace of rate hikes. Should 1.1500 prove to be reliable support a move back towards 1.1750 and 1.1850 could be on the cards. If bears succeed in dragging the GBPUSD back under 1.1500, the first point of interest can be found at 1.1400 where the 50-day SMA resides. Below this point, prices could sink towards 1.1200 and 1.0925.

BoE British Pound inflation Rates economic outlook central bank Federal Reserve