The BOE went and did it, delivering a „surprise“ 50 bps rate hike today. To be fair, markets had already priced in a near coin toss ahead of it so this isn’t that shocking. Nonetheless, it’s one that is causing a bit of a stir across broader markets and sterling had benefited from it – at least initially.
GBP/USD moved up from 1.2780 to a high of 1.2835 before settling around 1.2800 just minutes after the decision. (Update: It is now falling to 1.2750 on the day)
Now, there are a couple of things to be mindful about here. Let’s take a look at them:
- Markets had already priced in nearly 75 bps worth of rate hikes by August. That means either the decision today or August itself would have to be a 50 bps move to reaffirm that pricing. And we already got it here, so that is quickly out of the way already. So, this just confirms what market had priced in and doesn’t add any further hawkish connotations to it.
- Markets had also already priced in a peak in the BOE bank rate of close to 6% coming into the decision. It was around 5.93% and as at time of writing, that has just moved up to 5.98%. As such, there is a ceiling in which traders are not comfortable getting above just yet and that means there isn’t any additional hawkish elements to price in as well based on this front.
- With equities already rather sensitive this week, the BOE decision to go with a bigger rate hike is dampening the mood further. And as the pound tends to behave like a risk currency these days, that could stir up some headwinds for sterling to push gains on the day.
This article was written by Justin Low at www.forexlive.com.