BoE Monetary Policy Decision – Overview

The Bank of England (BoE) is scheduled to announce its monetary policy decision this Thursday at 11:00 GMT. The UK central bank looks poised to raise interest rates for the fourth time since December to the highest level in 13-years to contain inflation, which has risen to a 30-year high. The markets, however, remain divided over the need for a more aggressive policy tightening and a 50 bps rise. Moreover, an uncertain economic outlook in the wake of Russia's invasion of Ukraine and the latest COVID-19 outbreak in China could force policymakers to adopt a more flexible approach.

As Yohay Elam, FXStreet's own Analyst, explains: "Nobody can foretell how the war evolves, nor how supply-chain issues resulting from China's covid lockdown would impact the global economy and price developments. The BOE's inflation "fan chart" will likely be wide open, reflecting these uncertainties and conveying a message of "we do not know."

How could it affect GBP/USD?

Heading into the key central bank event risk, the GBP/USD pair dropped back closer to the 1.2500 mark and eroded a major part of the overnight post-FOMC gains amid resurgent US dollar demand.

Given that the MPC voted 8-1 in favour of the 25 bps rise in March, with one person voting against, any sign of widening dissent to keep the interest rate unchanged would be seen as a dovish tilt. This would further suggest that the rate hike cycle could be nearing a pause and weigh heavily on the British pound, paving the way for the resumption of the pair's downtrend witnessed over the past three weeks or so. According to Yohay: "it would take elevated inflation estimates and a unanimous vote to raise rates now to trigger an increase in the pound."

Meanwhile, Editor at FXStreet, offered a brief technical outlook for the GBP/USD pair: “The Relative Strength Index (RSI) indicator on the four-hour chart retreated to 50 in the early European session on Thursday, confirming that the pair has already lost its recovery momentum.”

Eren also outlined important technical levels to trade the major: “With a hawkish BOE hike, the pair could target 1.2600 (psychological level, 50-period SMA) and 1.2660 (Fibonacci 38.2% retracement of the latest downtrend). A daily close above the latter could be seen as a bullish development and open the door for additional gains toward 1.2750 (Fibonacci 50% retracement).”

“On the downside, 1.2500 (psychological level) aligns as the first support. A cautious policy tightening outlook could cause the pair to break below that level and fall toward 1.2420 (static level),” Eren added further.

Key Notes

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

  •  Bank of England Preview: Bailey set to bring sterling down with dovish hike

  •  GBP/USD Forecast: Hawkish BOE hike could lift the pound to 1.2660

About the BoE interest rate decision

The BoE Interest Rate Decision is announced by the Bank of England. If the BoE is hawkish about the inflationary outlook of the economy and raises the interest rates it is positive, or bullish, for the GBP. Likewise, if the BoE has a dovish view on the UK economy and keeps the ongoing interest rate, or cuts the interest rate it is seen as negative, or bearish.

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