Pound Sterling bounces back strongly as BoE holds higher interest rates narrative
- Pound Sterling bounces back as the BoE keeps interest rates at 5.25%.
- The BoE has stressed keeping interest rates restricted for a longer period.
- UK's recession fears have deepened as BoE's hawkish signals could dampen business optimism.
The Pound Sterling (GBP) recovers swiftly as the Bank of England (BoE) has kept interest rates steady at 5.25%. The BoE has kept interest rates unchanged for the fourth time in a row. Six of nine Monetary Policy Committee (MPC) members supported maintaining the status quo. BoE policymakers Catherine Mann and Jonathan Haskel voted for a further interest rate hike by 25 basis points (bps) to 5.50%, while Swati Dhingra endorsed a rate cut of the same size.
BoE Governor Andrew Bailey and his colleagues have emphasized keeping interest rates higher for longer until they get confident that inflation will return to the 2% target sustainably in the medium term. The longevity of higher interest rates depends upon the incoming data. The BoE says upside risks to geopolitical tensions, domestic price, and wage growth are more balanced. Andrew Bailey
Meanwhile, market sentiment is still volatile as the Federal Reserve (Fed) has cleared that it is in no rush to cut interest rates in March.
Daily Digest Market Movers: Pound Sterling rebounds as BoE avoids discussion on rate-cuts
- Pound Sterling recovers strongly as the BoE has left interest rates unchanged at 5.25%. The market participants widely anticipated a steady interest rate decision, but two votes favoring further policy tightening have portrayed a hawkish outlook on interest rates.
- BoE policymakers Catherine Mann and Jonathan Haskel favored a 25 basis points (bps) hike to tame upside risks to consumer price inflation, while Swati Dhingra supported a rate cut.
- Unlike the European Central Bank (ECB) and the Fed, which have discussed the timing and the scope of rate cuts this year, BoE policymakers haven't talked about rate cuts much, which indicates that it will keep interest rates higher for a longer period.
- A hawkish outlook on interest rates has deepened fears of a technical recession in the United Kingdom economy.
- The UK economy is on the cusp of a technical recession as it contracted by 0.1% in the third quarter of 2023, and a stagnant performance is anticipated for the last quarter of the same year.
- The Fed left interest rates unchanged on Wednesday for the fourth straight time as inflation has significantly come down all the way from a historic high of 11.1% to 4.0% in December.
- Regarding the US Dollar (USD) side of the GBP/USD pair, the Federal Reserve Chair Jerome Powell, in his monetary policy statement after Wednesday’s first meeting of 2024, said risks to achieving full employment and 2% inflation are better balanced. This provided mild support for the USD, which was bearish for the exchange rate.
- When asked about rate cuts in March, which would weaken the US Dollar, Powell commented that rate cuts are unlikely until they get greater confidence that inflation will come down to 2% sustainably.
- The US Dollar Index (DXY) delivered a V-shape recovery after Jerome Powell pushed back expectations of rate cuts in March to near 103.60.
- More action in the USD Index is expected as the US Institute of Supply Management (ISM) will report the Manufacturing PMI for January, which will be published at 15:00 GMT.
Technical Analysis: Pound Sterling holds recovery from 1.2630
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Pound Sterling discovers strong buying interest near 1.2625 but remains inside the last three weeks’ trading range of 1.2640-1.2775. The GBP/USD demonstrates a sharp volatility contraction on a broader timeframe, which may be the precursor of an eventual decisive break after the policy announcement by the BoE.
On the daily timeframe, a descending triangle chart pattern is in formation, which indicates indecisiveness with a slight negative bias. The downward-sloping trendline of the aforementioned chart pattern is placed from 28 December 2023 high at 1.2827 while the horizontal support is plotted from 21 December 2023 low at 1.2612. A decisive break through these boundaries would confirm a stronger directional move higher or lower – the BoE meeting may provide the catalyst.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, which indicates that investors await a potential trigger for further action.
Interest rates FAQs
What are interest rates?
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
How do interest rates impact currencies?
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
How do interest rates influence the price of Gold?
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
What is the Fed Funds rate?
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
