BoE hikes, but £ suffers

Hi everyone,


After a slow beginning to the week, things (as expected) burst into life with the central bank meetings. Unfortunately for most, it has come at a cost to Sterling sellers. But, judging by the performance of Sterling after the BoE result, it could have been much, much worse today..


Let's begin where the action started over in the US, where the Fed hiked interest rates by 75bp for the 4th consecutive month. The markets got this one right, even though there has been quite a bit of noise from political figures and economists to reduce the aggressive path of hiking rates. GBP lost 1% here versus the USD, mainly because of the firm statement from Fed Chair Powell, insisting they will not be changing stance anytime soon. 


Earlier this morning, we had a number of ECB members speak on interest rates. Most implied that for the next 2/3 months at least, we will see rates continue to rise as they have been. The hawkish comments saw £-€ rates tumble 1%, as everyone knows the BoE are not on the same cycle path. Rightly or wrongly, the EU & US are tackling inflation before recession and higher interest rates mean stronger currencies. 


Onto the big news for the day then and the markets once again got the call right. Even though there was a strong case for the BoE to raise by 50bp, 75bp was the result and interest rates are now at a 33-year high. The Pound lost 0.5% on release and a further 0.5% after the meeting (so far). What I will say is there is without doubt, the BoE has saved the Pounds bacon today, as a 50bp call could have been catastrophic.


Comments made by Governor Bailey suggest the UK is in a recession and one that is likely to last 2-years (most since records began). Future guidance on interest rates was we can expect to see 50bp calls ahead and that the peak rate is much lower than markets are expecting. Chancellor Hunt has also said the Government want lower interest rate hikes once the budget has been delivered.


For Sterling, it means most of the gains made in October have been given back. The dust will have to settle before knowing where the Pound goes from here. However, £-€ rates are only at a 1-week low and £-$ at a 2-week low. It was a damage limitation call from the BoE we suspect today. 


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