I'm going to use this post to also put up the key takeaways from the BOE meeting decision. So, let's dive right into it.
- BOE raised bank rate by 50 bps to 1.75%, as expected (~92% priced in according to OIS)
- Bank rate vote to hike was 9-0, but Tenreyro dissented by voting for a 25 bps rate hike instead
- BOE forecasts inflation to peak at 13%, sees 5(!) quarters of negative economic output starting from Q4
- Adds the passage "policy is not on a pre-set path" to forward guidance
There isn't anything there to really get the pound excited and the dire economic forecasts as well as the subtle shift, which is a page right out of the RBA playbook, is a signal that another central bank has joined the ranks in the next stage of the tightening cycle.
In other words, this is the BOE starting to acknowledge risks surrounding the economy and outlook and that could temper with their appetite to stick with rate hikes - or at least more aggressive ones - moving forward.
All in all, this reads like a one-and-done 50 bps rate hike, as much as punters are still betting on another one in September.
The pound has fallen on the decision after a bit of a whipsaw, with cable dropping to a low of 1.2092 before keeping around 1.2100-20 levels at the moment. Price was holding around 1.2170 before the decision with the whipsaw high hitting 1.2210 and held back by the 100-hour moving average (red line).
So, what's next for the pound?
There is some minor support around 1.2100 next and then the 29 July lows around 1.2062-65, so a break of those levels will put the pressure back on 1.2000 again; all else being equal. But the dollar side of the equation will also matter for cable, with the US jobs report a key risk event for tomorrow.
As for sterling itself, don't count on the BOE for any policy tailwind anymore. It is shaping up like they will be one of the first ones to pause in the tightening cycle and as soon as there is a clearer pivot in that sense in the months ahead, expect that to weigh more on the pound. For now, this just removes any potential tailwind for the quid but apart from the dire economic outlook, the subtle shift on its own may not be too heavy an anchor. That said, watch out for the technicals as outlined above.
