BOE Interest Rate Decision Preview: GBP/USD braces for volatility storm, eyeing a 75 bps hike
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UNLOCK OFFER- The BOE is set to raise the key rate by another 50 bps to 2.25% on Thursday.
- Governor Bailey could surprise with a 75 bps hike, trusting Truss’s energy relief plan.
- GBP/USD could see massive volatility, as the price remains at a critical juncture.
The Bank of England (BOE) is set to announce its interest rate decision on Thursday at 11:00 GMT, with markets bracing for a surprise 75 basis points (bps) rate hike. Pressure mounts for the BOE, as global central banks go aggressive on their tightening path to fight stubbornly-high inflation. What will it mean for GBP/USD?
Will a 75 bps hike be a surprise?
Kicking off the central banks’ week bonanza, the Swedish central bank, Riksbank, raised rates unexpectedly by 100 bps. The US Federal Reserve (Fed) and the Swiss National Bank (SNB) are widely expected to launch a 75 bps rate hike. Meanwhile, the European Central Bank (ECB) hiked rates by an unprecedented 75 bps earlier this month.
Therefore, a super-sized rate hike decision by the British central bank may be off a little surprise, as pressure is mounting on Governor Andrew Bailey and his colleagues to step up their efforts to curb inflation.
Financial markets are pricing in a roughly 75% chance of a three-quarter point increase in rates to 2.5%, compared to a 25% probability of a 50-bps lift-off. Meanwhile, BOE rates are then expected to rise by half a point at the November 3 meeting and by another 75 bps on December 15, taking rates to 3.75% by the end of the year. The central bank last delivered a rate hike of this size in 1989.
The UK headline inflation unexpectedly dropped to 9.9% YoY in August vs. July’s 10.1%. Although the latest annualized inflation data has shown easing consumer prices in August, the monthly figures point to a continued rise in consumer prices, by 0.5% in August. Unless the central bank strengthens its resolve to fight inflation by a jumbo rate hike, the cost-of-living crisis is likely to heighten and accentuate the dire economic outlook.
At its August policy meeting, the bank already predicted a recession in the fourth quarter of this year. Therefore, frontloading rate hikes may not do more harm to the economy. The BOE could muster up the courage to tame inflation, which is seen as the greater of the two evils, at the moment.
Another probable reason justifying an outsized rate hike is UK Prime Minister Liz Truss’s energy relief plan, which could help soften the downturn. Earlier this month, Bailey emphasized in his testimony before Parliament's Treasury Committee that it is “important that we have fiscal policy laid out clearly.”
However, Truss’s emergency energy support package could only have a temporary impact on taming inflation, as BOE hawk Catherine Mann and big global banks believe that these fiscal measures could keep prices more elevated into next year than the central bank is expecting.
Weaker sterling is also feeding into higher inflation levels and if BOE doesn’t live up to the 75 bps hike expectation this month, it will widen the Fed-BOE interest rate differential and further exacerbate the pain for GBP. It’s worth noting that GBP/USD is down nearly 15% this year.
Besides the rate hike announcement, the BOE is expected to confirm the beginning of outright sales from its GBP838 billion gilt stockpile, at a pace of around 10 billion pounds a quarter. Although it remains to be seen whether Bailey can go ahead with the quantitative tightening (QT) plans, given that Truss’s government plans to borrow GBP 100 billion to fund the energy relief package.
Trading GBP/USD with the BOE
It’s not a ‘Super Thursday’ but volatility is set to remain at its peak, especially in the aftermath of the critical Fed rate hike decision. GBP traders could reposition, as the dust settles over the Fed verdict, awaiting the BOE announcements. It is going to be a close call for the UK central bank and the decision is likely to trigger good two-way price action in GBP/USD. At the time of writing, the currency pair is trading close to the 37-year low of 1.1351 reached last Friday.
In a scenario where the UK central bank hikes the rate by 75 bps, it could be viewed as the BOE has strengthened its commitment to fight inflation despite looming recession risks. GBP/USD could see a temporary relief rally, as gains could fade later on amidst growth concerns.
Should the BOE deliver another 50 bps lift-off, it could trigger a fresh downswing for cable, as Bailey would stick to his cautious approach, disappointing GBP bulls with a dovish hike.
There are no economic projections and Bailey’s press conference following the September policy announcement, therefore, the language in the statement and the rate hike voting composition will be closely examined.
- The BOE is set to raise the key rate by another 50 bps to 2.25% on Thursday.
- Governor Bailey could surprise with a 75 bps hike, trusting Truss’s energy relief plan.
- GBP/USD could see massive volatility, as the price remains at a critical juncture.
The Bank of England (BOE) is set to announce its interest rate decision on Thursday at 11:00 GMT, with markets bracing for a surprise 75 basis points (bps) rate hike. Pressure mounts for the BOE, as global central banks go aggressive on their tightening path to fight stubbornly-high inflation. What will it mean for GBP/USD?
Will a 75 bps hike be a surprise?
Kicking off the central banks’ week bonanza, the Swedish central bank, Riksbank, raised rates unexpectedly by 100 bps. The US Federal Reserve (Fed) and the Swiss National Bank (SNB) are widely expected to launch a 75 bps rate hike. Meanwhile, the European Central Bank (ECB) hiked rates by an unprecedented 75 bps earlier this month.
Therefore, a super-sized rate hike decision by the British central bank may be off a little surprise, as pressure is mounting on Governor Andrew Bailey and his colleagues to step up their efforts to curb inflation.
Financial markets are pricing in a roughly 75% chance of a three-quarter point increase in rates to 2.5%, compared to a 25% probability of a 50-bps lift-off. Meanwhile, BOE rates are then expected to rise by half a point at the November 3 meeting and by another 75 bps on December 15, taking rates to 3.75% by the end of the year. The central bank last delivered a rate hike of this size in 1989.
The UK headline inflation unexpectedly dropped to 9.9% YoY in August vs. July’s 10.1%. Although the latest annualized inflation data has shown easing consumer prices in August, the monthly figures point to a continued rise in consumer prices, by 0.5% in August. Unless the central bank strengthens its resolve to fight inflation by a jumbo rate hike, the cost-of-living crisis is likely to heighten and accentuate the dire economic outlook.
At its August policy meeting, the bank already predicted a recession in the fourth quarter of this year. Therefore, frontloading rate hikes may not do more harm to the economy. The BOE could muster up the courage to tame inflation, which is seen as the greater of the two evils, at the moment.
Another probable reason justifying an outsized rate hike is UK Prime Minister Liz Truss’s energy relief plan, which could help soften the downturn. Earlier this month, Bailey emphasized in his testimony before Parliament's Treasury Committee that it is “important that we have fiscal policy laid out clearly.”
However, Truss’s emergency energy support package could only have a temporary impact on taming inflation, as BOE hawk Catherine Mann and big global banks believe that these fiscal measures could keep prices more elevated into next year than the central bank is expecting.
Weaker sterling is also feeding into higher inflation levels and if BOE doesn’t live up to the 75 bps hike expectation this month, it will widen the Fed-BOE interest rate differential and further exacerbate the pain for GBP. It’s worth noting that GBP/USD is down nearly 15% this year.
Besides the rate hike announcement, the BOE is expected to confirm the beginning of outright sales from its GBP838 billion gilt stockpile, at a pace of around 10 billion pounds a quarter. Although it remains to be seen whether Bailey can go ahead with the quantitative tightening (QT) plans, given that Truss’s government plans to borrow GBP 100 billion to fund the energy relief package.
Trading GBP/USD with the BOE
It’s not a ‘Super Thursday’ but volatility is set to remain at its peak, especially in the aftermath of the critical Fed rate hike decision. GBP traders could reposition, as the dust settles over the Fed verdict, awaiting the BOE announcements. It is going to be a close call for the UK central bank and the decision is likely to trigger good two-way price action in GBP/USD. At the time of writing, the currency pair is trading close to the 37-year low of 1.1351 reached last Friday.
In a scenario where the UK central bank hikes the rate by 75 bps, it could be viewed as the BOE has strengthened its commitment to fight inflation despite looming recession risks. GBP/USD could see a temporary relief rally, as gains could fade later on amidst growth concerns.
Should the BOE deliver another 50 bps lift-off, it could trigger a fresh downswing for cable, as Bailey would stick to his cautious approach, disappointing GBP bulls with a dovish hike.
There are no economic projections and Bailey’s press conference following the September policy announcement, therefore, the language in the statement and the rate hike voting composition will be closely examined.
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