Pound Sterling Pares Post-BOE Gains

06/17/2022

1 minute read

2022.06.17 15:11

The pound sterling had a wild day on Thursday, trading in a 350-point range. Sterling traded in a 300-point range overnight, with markets not quite sure what to make of the BoE’s 0.25% rate increase. In the end, the pound received a thumbs-up and posted a gain of 1.45%.

The rate hike, which was the fifth in a row, was indeed modest, but investors liked that the BoE signaled that more rate hikes were on the way. As well, the MPC’s split 6-3 decision (3 members voted for a 0.50% hike) no doubt sent a signal that the BoE could provide a hawkish pivot if inflation does not peak.

The BoE has warned of a recession and has forecast that inflation will top 11%, making it difficult to feel reassured by the central bank. Still, it appears that with the MPC unanimously voting to raise rates at the meeting, investors had something to feel optimistic about.

The US dollar has shown that it can recover quickly, and the risk for the pound remains tilted to the downside, with dark clouds hovering above the UK economy. GDP fell by 0.3% in April after a 0.1% decline in March, the first back-to-back contractions since March 2020, at the start of the Covid pandemic. The OECD has forecast that the UK economy will grow by 3.6% this year but will stagnate in 2023, which would make it the worst-performing G-7 economy in 2023.

In a week of dramatic central bank decisions, the Federal Reserve won the week’s highlight. The Fed delivered a 0.75% salvo, the first since 1994, bringing rates to a target range of 1.50-1.75%. The Fed downgraded its US growth forecasts for 2022 and 2023 but insisted that there would be no recession.

Some analysts would beg to disagree, but the financial markets were relieved, as Fed Chair Powell said he didn’t expect 0.75% rate hikes to become common. The move signals that the Fed plans to use all available tools to wrestle down inflation, which has hit a 40-year high.

Pound Sterling Pares Post-BOE Gains GBP/USD daily chart.