- The Bank of England rose 25 basis points and the pound initially slumped, but then rebounded on dollar weakness.
- The Bank of England decided not to give any guidance on the pace and timing of monetary policy adjustments.
- The negative data on housing in the US fueled speculation that this country could enter a recession.
The GBP is rising strongly following the 25 basis point rate hike by the Bank of England (BoE), which is now playing catch up with the US Federal Reserve as the former has raised rates rates at 1.25%, while the latter has outperformed the BoE, with the Federal Funds Rate (FFR) at 1.75%. However, despite the above, the GBP/USD it is up 1.47%, trading at 1.2352 at the time of writing.
Market sentiment remains negative, as evidenced by losses in US equities, which are between 2.70% and 5%. There are fears that the Federal Reserve could trigger a recession after reacting late to high inflation figures.
The Bank of England raises rates, although it expects the British economy to contract
On Thursday, the Bank of England raised interest rates by 0.25%, causing GBP/USD to fall to daily lows around 1.2050. However, GBP/USD buyers lifted the pair around that area, which is up close to 200 pips on the day.
In its monetary policy statement, the Bank of England updated its CPI projections and expects inflation to peak at 10% in the fourth quarter of 2022. The Monetary Policy Committee (MPC) estimates that inflation will moderate in around the 2% target in two years as external factors fade. As for UK growth, the bank expects a contraction in the second quarter of -0.3%, weaker than forecast in its May report.
It should be noted that the statement did not give any guidance on further increases in the short term. The BoE stressed that “the scale, pace and timing will reflect the Committee’s assessment of the economic outlook and inflationary pressures.”
Despite the above, some banks expect the BoE to raise the Bank’s interest rate to 2.25%.
Meanwhile, poor US housing economic data is fueling speculation of a recession in the country. US homebuilding fell -14.4%, while building permits dropped 7%. Additionally, the Philadelphia Fed manufacturing index for June showed signs of a slowdown in the US economy, contracting -3.3, disappointing estimates of 5.5.
Key technical levels
Source: Fx Street
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