HSBC: Here is why risk-reward around this week's BOE may not be encouraging for GBP bulls

HSBC cautions GBP bulls about the uncertain risk-reward ratio surrounding the upcoming Bank of England meeting, predicting potential short-term gains if the rate hike is significant, but emphasizing the fleeting nature of the benefits and the likelihood of a drop if a smaller rate hike is implemented.

Adam Button

Monday, 31/07/2023 | 19:03 GMT

HSBC lays out its perspective on the potential movements of the GBP in relation to the Bank of England's (BoE) upcoming decisions:

Key Takeaways:

Expected Rate Hike: HSBC's primary assumption is that the BoE will increase the policy rate by 50 basis points on 3 August. The market's current expectation is a 37 basis point increase.
Transient GBP Upsurge: If HSBC's 50 basis point forecast holds true, they anticipate a quick, reactive GBP purchase surge. However, they emphasize that any such GBP increase would be temporary.
Alternate Rate Hike Scenario: There is a substantial likelihood, according to HSBC, that the BoE will opt for a smaller rate hike of 25 basis points. In this scenario, the GBP would likely experience an immediate decline.
Unfavorable Risk-Reward: Given the scenarios and their associated potential outcomes, HSBC believes the risk-reward ratio surrounding the BoE meeting does not offer much incentive for those bullish on GBP.

Summary:

HSBC sees a challenging environment for GBP enthusiasts ahead of the BoE meeting. While there's potential for short-term gains if the BoE implements a 50bp rate hike, the benefits are expected to be fleeting. Moreover, the possibility of a smaller rate hike of 25bp would

probably lead to an immediate GBP drop, further complicating the risk-reward landscape for GBP bulls. GBP/USD was last at 1.2837.

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