The BOE may be sticking with a more gradual approach for now but money market bets on a more aggressive push by the central bank are not letting up just yet. With just four more policy meetings left for the year, traders are ramping up bets that the BOE will hike to 3% by year-end.

To put it in simpler terms, that’s at least seven 25 bps rate hikes. That alludes to the fact that traders are expecting a more aggressive BOE in September and October i.e. at least 50 bps rate hikes in both meetings.

The pricing is sparking a bit of a turnaround in the pound, with cable recovering back to test its 100-hour moving average (red line) again at 1.2160 on the day.

As much as it looks like the BOE may push through in its battle against inflation, they haven’t quite offered up much in terms of their pain threshold when tightening policy into a likely recession. I think that predicament could see market pricing backtrack in the months ahead as UK economic data worsens. In turn, that will add more uncertainty and downside potential for the pound.

This article was written by Justin Low at www.forexlive.com.

• ECB policymakers worried that market stress may hinder monetary policy
• Want new instrument to be ready for July meeting
• Likely to offset bond-buying with the new instrument

The report by Bloomberg adds that the tool would probably involve „selling other securities“ so purchases do not clash with their efforts to tighten policy. Essentially, this is QE but not exactly QE in some form of convoluted way.

However, just be wary that even if the ECB ‚wants‘ the new instrument to be ready in the next few weeks, it doesn’t mean that it will happen. I would expect policymakers to go through a series of alternatives and then iron out the nooks and crannies before finalising anything. And summer time in Europe could make it harder to manage timelines.

EUR

This article was written by Justin Low at www.forexlive.com.

That has seen cable fall to a low of 1.2050 after having earlier risen in the run up to the decision as it seemed that traders were getting a tiny bit excited that the BOE may perhaps be more aggressive.

The push higher earlier stalled around the 100-hour moving average and sellers were quick to send cable back down in the aftermath of the BOE decision, with price falling from 1.2150 to 1.2050 levels at the moment.

The BOE remains in a rather unenviable spot so you can’t really blame them for going with just a 25 bps rate hike. A 50 bps rate hike on paper may look like they are being more serious to combat inflation but at this point with inflation nearing double-digits, it hardly matters. Instead, it would just invite more recession risks as mentioned earlier here.

The latest policy step by the BOE does little to change the overall outlook that markets are still likely to be less certain about the central bank’s appetite to keep hiking as the economy starts to run into the ground. The UK remains the lead runner in the recession race and that factor alone is enough to keep pressure on the quid in the bigger picture of things.

This article was written by Justin Low at www.forexlive.com.

• Prior 1.00%
• Bank rate vote 9-0* vs 9-0 expected (*Haskel, Mann, Saunders voted for a 50 bps rate hike instead)

• CPI inflation is expected to be over 9% during the next few months
• CPI inflation to rise to slightly above 11% in October
• BOE will take the actions necessary to return inflation to the 2% target sustainably in the medium-term
• The scale, pace and timing of any further rate hikes will reflect the assessment of the economic outlook and inflationary pressures
• BOE will be particularly alert to indications of more persistent inflationary pressures
• BOE will act forcefully in response, if necessary
• Full statement

The pound has fallen on the decision with cable slipping from 1.2150 to 1.2060 as the BOE delivered a rather straightforward decision. As mentioned earlier here, the risks either way are likely to point towards the downside for the pound.

The central bank is sticking with a more gradual approach in line with economic considerations but it won’t do much to alleviate the narrative that inflation is set to hit double-digits in the UK and that the cost-of-living crisis is set to worsen in the months ahead.

This article was written by Justin Low at www.forexlive.com.

The consensus is for the BOE to hike rates by 25 bps today, given considerations to recent economic headwinds. However, after the more aggressive Fed yesterday and SNB surprise earlier today, I reckon it is inviting some bets for a bigger rate increase by the BOE later.

Cable fell to a low of 1.2058 earlier in the session but has picked itself up to 1.2165 currently and running into a test of the 100-hour moving average (red line) at 1.2163. There is also still near-term resistance closer to 1.2200 to limit gains for the time being.

As much as a surprise 50 bps rate hike by the BOE may see a knee-jerk reaction higher in the pound, I would say the play is to fade that as ultimately such a move would just invite sooner recession risks for the UK. More on that here.

This article was written by Justin Low at www.forexlive.com.