Pound Sterling: Pump-and-Dump Reaction Seen vs. Euro and Dollar to Bank of England 50bp Hike

PoundSterlingLIVE

Published Jun 22, 2023 12:54

Pound Sterling: Pump-and-Dump Reaction Seen vs. Euro and Dollar to Bank of England 50bp Hike

Pound Sterling: Pump-and-Dump Reaction Seen vs. Euro and Dollar to Bank of England 50bp Hike

PoundSterlingLIVE - The Bank of England grasped the seriousness of the UK's inflationary pressures by opting to raise interest rates by 50 basis points, a move that Pound Sterling Live reported was a bare minimum if the Pound's 2023 gains were to be defended.

The Monetary Policy Committee (MPC) voted by a majority of 7–2 to increase Bank Rate by 50bp to 5.0%, in what amounts to a strong 'hawkish' signal.

But in a farcical development, two members of the MPC - Tenreyro and Dhingra - opted to keep interest rates unchanged.

"The second-round effects in domestic price and wage developments generated by external cost shocks were likely to take longer to unwind than they had done to emerge. There had been significant upside news in recent data that indicated more persistence in the inflation process, against the background of a tight labour market and continued resilience in demand," said the Bank in a statement.

It stated it would be prepared to raise interest rates further if the data warranted, confirming its data-first approach remains in place.

"The MPC did the right thing, raising the Bank Rate by 0.5pc to 5pc. A strong signal was needed to combat the stickiness of inflation and the threat of rising wage inflation. For once, the Committee has acted boldly and this should help return inflation to a downward path," says Andrew Sentance, a former member of the MPC and a critic of the Bank's go-slow approach to dealing with inflation.

Looking at the foreign exchange market reaction we can see an initial knee-jerk move higher by the British Pound which confirms the initial 'hawkishness' signalled by the 50bp move and the 7-2 majority for such a hike. But this soon gave way to selling pressures that will invite an avalanche of analyst commentary that the market is baulking at the UK's inflation problem.

The Pound to Euro exchange rate rose to 1.1653 but soon pared the advance by retreating to 1.1585. The Pound to Dollar exchange rate spiked to 1.283 before retracing to 1.2764.

The currency market reaction thus far indicates the Pound would likely have come under more sustained selling pressure if the Bank had opted to stick with its 25bp hike increments.

Ahead of the decision, markets were priced for Bank Rate to rise to as high as 6.0% by the time the MPC was done with this cycle, an expectation reflected in rising UK bond yields and the Pound.

Interestingly, the UK two-year bond yield - the key yardstick for UK finance products such as mortgages - actually fell following the 50bp hike.

This potentially signals the market believes by going hard now the Bank can get a grip on inflation, meaning it does not have to take Bank Rate as high as 6.0%.

This would, understandably elicit some weakness in the Pound which tends to track bond yields.

Get The App
Join the millions of people who stay on top of global financial markets with Investing.com.
Download Now

"They have done us a favour and gone with 'just get on with it'," says Jordan Rochester, FX strategist at Nomura.

"I suspected knee-jerk GBP strength on the 50bps at first, but ultimately this could lower the odds of more hikes needed later this year and with it see GBP strength limited given just how much was already priced in before this," he adds.

Joseph Little, Global Chief Strategist at HSBC (LON:HSBA) Asset Management says a "hawkish super-hike" comes in the context of this week’s disappointing inflation print and a widespread recognition that UK policymakers now need to "get ahead of the curve".

A key downside risk to the Pound is that the steep rise in interest rates prompts a sharp slowdown in economic activity over the coming months, which then prompts the Bank to react by cutting rates sharply further out.

"But after the fastest rate tightening cycle since the 1980s, getting more hawkish now is not without risk. A looming ‘mortgage squeeze’ and a turn in the credit cycle means that the economy now faces a recession as we head toward 2024," says Little.

But short-term, the Pound has been broadly supported by elevated Bank of England rate expectations, which could keep it in touch with recent multi-month highs against the Euro and Dollar.

Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, points out the MPC demonstrated its determination to get a grip on domestically-generated inflation by choosing to omit any language designed to assure investors that the peak might be near.

"With the Committee showing little hesitation today to opt for a 50bp hike, and services CPI inflation likely to take a while to roll over, we now expect Bank Rate to peak at 5.50%, with 25bp hikes in August and September," he adds.

An original version of this article can be viewed at Pound Sterling Live

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

Sign out
Are you sure you want to sign out?
NoYes
CancelYes
Saving Changes