BOE Analysis: Bailey bails out the bears by promising modest hikes, GBP/USD set to suffer
- The BOE raised rates by 25bp as expected, but nearly hiked by 50bp.
- Governor Bailey clarified there is no premeditated path of rate hikes.
- GBP/USD may continue falling on the mixed message, in contrast with the Fed.

Close Call 2 – the Bank of England provided has almost announced a double-dose rate hike of 50 basis points if it were not for Governor Andrew Bailey. That surprise has sent GBP/USD higher. This move harks back to November, when markets were convinced of a BOE rate hike that never came then, but only in December. However, February's hawkish surprise has proved short-lived.
No fewer than four members wanted to lift borrowing costs from 0.25% to 0.75%, a shocker, and it would take only one more hawk to tip the vote in that direction. Bailey belonged to the narrow 5:4 majority, and this show of strength from the hawks initially sent GBP/USD higher.
The BOE also published forecasts for higher inflation – above 7% in April, over 5% for a one-year horizon – adding to the notion that the bank is going all-in to fight inflation.
However, Governor Bailey already sang a different tune in his press conference. While he said more rate increases are coming, he said these would be modest. In addition, while recognizing that prices of imported goods could result in broader inflation, he seemed unclear about that.
He clarified that rate increases are not on a premeditated path and plainly said about rates "please don't get carried away."
GBP/USD has erased its gains, but what's next? There is room for further falls in GBP/USD, not only on Bailey's calming words but also on the contradiction between the BOE and the US Federal Reserve.
The American economy is on fire, suffering from more significant labor shortages and is set to raise interest rates more than the BOE. While the London-based institution has a head start, the Fed will likely move faster later on. Currencies move according to expectations, not the current state of affairs.
The BOE may move fast and hard, but then stop, the Fed may just keep going on.
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Author

Yohay Elam
FXStreet
Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

















