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BOE Preview: A 25 bps rate hike can’t save GBP bulls amid economic gloom

  • The Bank of England (BOE) is set for a 25 bps rate hike on Super Thursday.
  • The no. of dissenters and the BOE’s forward guidance will hold the key.
  • Nothing can stop GBP/USD’s downfall amid aggressive Fed bets and bearish technicals.

GBP/USD remains exposed to downside risks, as we progress towards the Bank of England (BOE) ‘Super Thursday’. Another 25 basis points (bps) rate hike remains on the table from the BOE, although it would not be enough to rescue GBP bulls.

The UK central bank is set to announce its policy decision at 11:00 GMT, which will be accompanied by the meeting’s minutes and inflation report.

BOE walking a tight rope

May’s ‘Super Thursday’ will likely see the BOE delivering another 25 bps interest rate hike, lifting its benchmark rate to 1%, the highest since 2009. This would be the fourth straight rate hike, making it the first time the BOE has tightened that way since 1997.

BOE Governor Andrew Bailey is scheduled to hold a press conference following the publication of the Monetary Policy Report (MPR) at 11:30 GMT.

Markets have priced in a 25 bps lift-off, predicting the bank rate to rise to 1.5% by early 2023. Heading into another rate hike this week, the outlook for the UK economy continues to be dour while the central bank remains committed to tackling the inflation monster.

Although fourth quarter UK GDP was revised upwards to 1.3% QoQ, a protracted Russian invasion of Ukraine and China’s coronavirus lockdown-driven global supply chain crisis is spelling recession fears for the British economy.

Bailey and Co. are in a tough spot yet again, as the inflation rate holds at a 30-year high of 7% in March, driven by a sharp increase in petrol and diesel costs.

In a balancing act at its March policy meeting, the BOE’s cautiousness on the future tightening path disappointed the hawks and since then GBP/USD has lost roughly 1000 pips to hit 21-month lows just above 1.2400.

Governor Bailey said last month, "We are now walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that that could create a recession.”

GBP/USD probable scenarios

The central bank’s forward guidance will hold the key at this meeting, while markets will also focus on the number of dissenters. Deputy Governor Jon Cunliffe was the only dissenter last time but if two or more members join him against a rate rise, then it would mean an outright dovish hike. GBP/USD could see a fresh downside leg, with a breach of the 1.2400 level well on the cards.

On the other hand, if policymakers voice concerns over inflation broadening out even while acknowledging the material risks to growth to the downside, it could be seen as a shift to a hawkish pivot. Further, any hints of a potential quantitative tightening (QT) by active sales of gilt yields in the upcoming months could be seen as hawkish.

In such a case, cable’s recovery could gather steam, with the pair looking for a bullish reversal towards the weekly highs of 1.2600 en-route to 1.3000.

But traders should bear in mind that the BOE is not the only factor impacting the pair today, as the expected hawkish Fed decision will also play a crucial role in GBP/USD’s price action ahead of the BOE event. 

Author

Dhwani Mehta

Dhwani Mehta

FXStreet

Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.

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