The pound is under moderate pressure after the Bank of England surprised markets with a 50 basis point rate hike, taking the bank rate to 5.00%.
Normally rate hikes are bullish for a currency as they boost yields but in this case a pair of things are weighing on the pound:
1) Hikes were expected later anyway, so this is more of a timing change than a genuine surprise. That said, the terminal rate expected by markets has also edged up, so there is genuine change.
2) By hiking more aggressively now, the Bank of England may have to cut more later. The shock today brings the UK closer to a recession and the market is sussing out the possibility that the BOE will need to push the economy into a tough recession to get on top of inflation. Ultimately, capital doesn't flow towards shrinking economies and that's the message from GBP today. Finally, there's the risk of some kind of black swan hitting the economy if/when rates hit 6%. We already got a taste of that last year with the liability-driven investment fiasco.
There's also an element of US dollar strength at work as the dollar hits session highs across the board on risk aversion.
