- The BOE has raised rates by 0.25% as widely but not unanimously expected.
- GBP/USD has tumbled on a dovish dissent, also reverting a rise beforehand.
- Further rate hikes, hopes for a deal on Ukraine, could help GBP/USD recover.
A dovish hike – the Bank of England has delivered a cautious increase of interest rates, similar to what investors had expected from the Federal Reserve. One dovish dissenter – Jon Cunliffe who preferred to leave rates unchanged – and a subtle change in tone are genuine reasons to sell sterling.
The bank previously said that further modest tightening is likely to be appropriate, and now it says it may be appropriate. One dovish dissenter out of nine and that single word do not go the full length to explain the 100-pip downfall of GBP/USD.
A quick look at the chart reveals the main reason – a classic "buy the rumor, sell the fact" response. Cable has reverted to levels seen early in the day. Investors bet on a 50 bps rate hike that – 40% chance according to bond markets, and that wager totally failed.
What's next? GBP/USD has room to recover from these lows, for several reasons.
First, the BOE forecasts inflation to hit 8%, an alarming level and a substantial upgrade from previous projections. It would have to act to curb it, especially as long as Britain's labor market looks strong.
Second, the bank's mood may swing back to a hawkish mood next time – Governor Andrew Bailey shocked markets by refraining from lift-off in November but then provided a surprising hike in December – without a press conference to explain it. The pendulum swing to the hawkish side may follow.
Third, there is room for short-term recovery on hopes for a Ukraine-Russia deal, or at least a truce. Investors remain optimistic, and that could weigh on the safe-haven dollar. China's pledge to support the economy and the stock market also underpins sentiment, another greenback-adverse development.
All in all, a buying opportunity seems to be on the cards after a "buy the rumor, sell the fact" response.
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