- The BOE has left rates unchanged but could do it when QE ends next month.
- Two members voted to raise rates, and others could join.
- Forecasts are pointing to 5% inflation and 4% unemployment, reflecting a hot economy.
A decision on a knife's edge, or coin-toss – and it fell towards refraining from action. The Bank of England has left its interest rate unchanged at 0.1%, the lowest in the institution's 300+ history. GBP/USD reacted accordingly – and in line with its extreme volatility – tumbling down toward 1.3550, nearly 100 pips.
It may have gone too far. Why?
First, the BOE signaled it "will be necessary" to raise rates over the coming months in order to bring inflation sustainably to the 2% target. Moreover, the bank's Quantitative Easing program ends next month, which would be the perfect timing.
Second, two members voted to hike borrowing costs already now, and that serves as another hint that the minority supporting acting is growing. Moreover, one member already wanted to end the bond-buying scheme at this juncture.
Third, the BOE's Monetary Policy Report has shown forecasts that reflect a steaming-hot economy. Inflation is expected to hit 5% in April, up from 3.1% now. The unemployment rate carries estimates of tumbling to 4%, also an excellent level.
A rate hike is coming in December – and other ones could follow shortly afterward. Sterling's reaction is in line with a wrong market bet of an increase already now – but our preview warned about erring on the side of caution.
And now, there is room to rise back up as the dust settles.
GBP/USD Technical View
Technically, the Relative Strength Index on the four-hour chart is touching 30, entering oversold conditions.The drop below the mid-October support line of 1.3565 could prove fake.
Resistance awaits at 1.3610, 1.3670 and 1.3695. Support awaits at 1.3520 and 1.3430.
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