- The BOE has surprised by raising rates in December, a decision unaccompanied by a presser.
- Officials in London are following their hawkish counterparts in Washington.
- Worsening covid conditions and a "stealth" lockdown could still depress the pound.
"Unreliable boyfriend" has been the derogatory term used against Bank of England Governor Andrew Bailey. He seems to be living up to that image of not being trustworthy – raising rates without communicating it in advance. That contrasts last month's surprise "no-change." While sterling's leap looks justified, it could prove temporary.
The official justification for raising rates from 0.10% to 0.25% has been the leap of inflation from 4.2% to 5.1% in November, beating expectations. That figure came out only on Wednesday and may have tipped the scales. The labor market is also doing well, as employment remains robust despite the end of the furlough scheme.
However, perhaps the most significant trigger for the BOE's move comes from over the Atlantic – the Federal Reserve doubled down on tapering and signaled no fewer than three rate hikes in 2022. That was a hawkish decision, and markets received it better than expected.
Bailey may have looked at the market reaction and thought to give it a go. It is essential to remember that the 15bp rate increase still leaves borrowing costs below pre-pandemic levels.
GBP/USD has leaped by some 80 pips, fully justified given the 40% chance for a move. However, this is unlikely to last.
Once the dust settles from the BOE surprise, markets could return to covid and its grim state in the UK. Britain reported over 78,000 cases on Wednesday, a record. Warnings of hospitals filling up could materialize given the rapid contagion pace.
It does not necessitate an official lockdown – which Prime Minister Boris Johnson rejects – to slow the economy down. The mere scary headlines, restrictions on travel and worry could keep consumption depressed. That would weigh on sterling and also push the BOE to pause before the next move.
Overall, this rapid increase in the pound's value, however, justified, could prove to be the high watermark.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
EUR/USD clings to gains above 1.0750 after US data
EUR/USD manages to hold in positive territory above 1.0750 despite retreating from the fresh multi-week high it set above 1.0800 earlier in the day. The US Dollar struggles to find demand following the weaker-than-expected NFP data.
GBP/USD declines below 1.2550 following NFP-inspired upsurge
GBP/USD struggles to preserve its bullish momentum and trades below 1.2550 in the American session. Earlier in the day, the disappointing April jobs report from the US triggered a USD selloff and allowed the pair to reach multi-week highs above 1.2600.
Gold struggles to hold above $2,300 despite falling US yields
Gold stays on the back foot below $2,300 in the American session on Friday. The benchmark 10-year US Treasury bond yield stays in negative territory below 4.6% after weak US data but the improving risk mood doesn't allow XAU/USD to gain traction.
Bitcoin Weekly Forecast: Should you buy BTC here? Premium
Bitcoin (BTC) price shows signs of a potential reversal but lacks confirmation, which has divided the investor community into two – those who are buying the dips and those who are expecting a further correction.
Week ahead – BoE and RBA decisions headline a calm week
Bank of England meets on Thursday, unlikely to signal rate cuts. Reserve Bank of Australia could maintain a higher-for-longer stance. Elsewhere, Bank of Japan releases summary of opinions.