The Bank of England is expected to increase rates by 25 basis points to 0.50% when they announce their decision at 7:00 AM/11 AM GMT. The market has price in a 90% chance for a hike tomorrow.
The hike will be the 2nd hike in succession. On December 16 (the BOE last meeting), the Monetary Policy Committee surprised the market by 15 basis point rise to 0.25% from 0.10%. The decision was near unanimous at 8-1 (Tenreyo dissented). In the statement, the central bank said:
'Bank staff continue to estimate that underlying earnings growth has remained above pre-pandemic rates, and the Committee continues to see upside risks around the projection for pay in the November Report'.
Since then the inflation has moved up to a new 30 year high of 5.4%
BOE Bailey testified last week:
- Need to keep inflation pressure from labor market in mind, that influenced my thinking on Dec rate hike
- Some aspects of inflation ought to be transitory
- The tightness of the labor market is the first, second and third thing businesses want to talk to me about
- We are seeing some evidence of second-round inflation effects
- There is an argument that higher inflation could retrain demand in the economy and bring inflation back down
Although there was some concerning comments, he did also give the alternative view (that demand could come down and lower inflation and the transitory impact).
MPC Mann said said on January 21:
- Changing expectations is the first defense against a reinforcing wage-price dynamic
- If the effects of supply-demand imbalances in 2021 continue, we could see another jump in wages and prices in 2022
- To the extent that global inflation underpins UK domestic inflation, monetary policy's reaction would have to be more severe than appropriate for domestic conditions alone
- Inflation data since November haven't been consistent with stabilization
- To the extent that financial markets are already cautioning decisions, the next steps could exhibit a shallower path
Looking at the hourly chart of the GBPUSD below, the price initially moved higher to 1.3373 on the rate hike on December 16. It then moved lower to 1.3171 on December 20 before rising/trending steadily to the January 13 high at 1.3747.
At the peak, the USD became the focus as US rates spiked higher and increasing expectations for more Fed hikes in 2022. The GBPUSD trended down to 1.33574 on the change in the tone. That move briefly took the price below the December 16 high on January 27th(on the last rate hike day).
Since that bottom on January 27, the price is up 4 consecutive days and trades at 1.3579 currently.
Technically, the move higher has taken the price above the 100 hour moving average and 200 hour moving averages currently at 1.3452 and 1.3472 respectively. Today the price also extended back above its 100 day moving average at 1.3513. Those levels will now be risk levels on the downside for the bulls (the buyers are more in control). A move back below the 100 day moving average (and then the 200 hour and 100 hour) would be needed to tilt the bias back to the downside.
On the topside, the 61.8% at 1.35987 (call it 1.3600) would open the door to 1.36188 and then 1.3662 and 1.3688. Move above those swing levels and the high from January at 1.37479 will be eyed.
