BoE surprises with hawkish policy update

Hi everyone,


Yesterday's BoE interest rate decision and following MPC meeting caused havoc on the market. When news broke that rates had been hiked 25bp for the 5th consecutive month (as expected), Sterling was sent lower across the board. Traders saw the decision as 'weak', determining the continued gradual increase as not good enough from the Bank. 


GBP lost 0.8% across the board just 2-minutes after the release, a scenario that was always going to play out after the bumpy week Sterling has had. But... A vote of 6-3 (the latter wanting a 50bp hike) and new guidance from the MPC, propelled the £ up to the highest point this week against most currencies. 


Judging by the market swings seen this week alone, it's clear investors are finding it hard to put a value on the Pound. It means GBP is trading in a hypersensitive market where it is losing and gaining dramatically after economic and political events. £-€ rates have moved more than 2% this week with the £-$ (the more volatile pair) closer to 3%. An impossible week to navigate and judge what happens next. 


With the Fed raising rates by a huge 75bp on Wednesday, the ECB and other central banks planning on 50bp in the months ahead, a 25bp hike from the BoE was a slow lane move. However, the Bank dropped the cautious tone over what could happen next and replaced it with an openness to force higher rates if the data proves it needs to. 


Larger hikes are planned over in the US and in order to keep a lid on imported inflationary pressure within the UK, the Bank cannot fall too far away from the Fed. Therefore, investors are banking on a larger hike cycle, more in-line to forecasts before May's downturn. Investment banks are following suit too with Deutsche and Barclays predicting 50bp is coming in August. 


All of a sudden, not only does respite come for the Pound but potential of growth from the current trading levels. Of course, this can all change in an instant, but for now there is some positivity over Sterling at long last!


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