Hike rates

Pound stable as BoE hikes rates by 75bps

boe rate Key decision points:

  • 75bp Hike by the bank of england to meet expectations.
  • Vote Split 7-2 in favor of the 75 base point hike.
  • The majority of MPCs believe Hike 75bp Would reduce the risk of a costly future tightening.

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The bank of england triggered its biggest interest rate hike in 33 years by warning that inflation is expected to peak around 11% in the fourth quarter. The vote was unanimous in terms of a hike, however, policymaker Dhingra voted for 50 basis points while Tenreyro voted for a 25 basis point hike. The bank expects the UK economy to contract by 1% in 2024 compared to previous estimates of 0.25%. The forecast is based on a peak market rate of around 5.25%.

The BOE insists that the peak rate is likely below what markets are currently pricing while warning that they will act forcefully on persistent inflation. The central bank says the recession started in the third quarter as GDP fell 0.5% and is expected to last until 2023.

For all economic news and events affecting the market, see the DailyFX Calendar

As markets continue to await the new medium-term fiscal plan, pressure on the bank of england (BoE) has been reduced. The bank failed to achieve a 75 basis point hike in September and since then the book strengthened against the greenback. Recent rhetoric from the BoE and some policymakers has hinted at their unease with the amount of bullish markets are pricing in. BoE decision-maker Mann (a falcon) recently said that market prices were too aggressive at this point. The August BoE forecast of a recession was based on a peak rate of 3%, with markets now valuing around 5%. According to Deputy Governor Broadbent, this could lead to a decline of almost 5% in GDP over the next few years.

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The focus will now be on the “autumn statement/fiscal plan” scheduled for November 17, as the government seeks to close the borrowing gap. Markets are much calmer with Prime Minister Sunak and Chancellor Hunt driving the fiscal plan, with taxes and energy prices sure to be key issues. Given yesterday’s fed At the meeting, it looks like the US will continue to raise rates, albeit in smaller increments, which could add further affliction to the pound.

Market reaction

GBPUSD 15M Chart

Graph, line graph, histogram Description automatically generated

Source: TradingView, prepared by Zain Vawda

GBPUSD’s initial reaction saw a spike lower before recovering to trade relatively flat. Downside pressure remains on the pair as dollar index continues its upward movement.

Key intraday levels to watch:

Support areas

Areas of resistance

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda

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