Bank of England hikes interest rates as scheduled, inflation limits follow suit

The pound fell slightly this week by 0.05% to 1.2302, hitting a new low of 1.1932 since late March 2020 during the session. The Federal Reserve raised interest rates by 75 basis points, and the Bank of England was quite satisfactory, raising interest rates by 25 basis points as scheduled. Faced with a weak economic outlook, the Bank of England is clearly not willing to follow the Fed's lead easily.

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The U.S. Commodity Futures Trading Commission CFTC foreign exchange business position report shows that as of the week of 2022-06-14 (hands) GBP/USD long positions decreased by 7731 lots to 184011 lots. Rising political tensions between the UK and the EU, as well as the UK's growing challenge of high inflation and recession risks, will continue to weigh on the pound, which risks falling to 1.1410-25.

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This week, the Bank of England raised borrowing costs for the fifth time since December, with the UK benchmark interest rate now at 1.25%, the highest level since January 2009. With the Fed raising interest rates by 75 basis points the night before, some market participants were betting on the Bank of England to do more, but Britain's economic outlook is the weakest of the major developed nations, limiting the Bank of England's follow-through.

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"A (relatively low) 25bps rate hike by the Bank of England is not in principle bearish for the pound, as it later articulated further rate hikes in a slightly more persuasive manner," Commerzbank analysts wrote in a note. , so the pound can rise.”

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Economists at Scotiabank said: "In addition to the weakening UK economy, EU-UK tensions over the UK's push to unilaterally rewrite the Northern Ireland Agreement and Sturgeon's push for a Scottish independence referendum next year are weighing on the pound popularity."

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The escalating row over the status of Northern Ireland could lead to higher trade barriers between the UK and the EU. The European Commission on Wednesday (June 15) launched two new legal proceedings against London and resumed another previously suspended challenge in response to the British government's plans to overturn trade rules for Northern Ireland after Brexit.

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Deutsche Bank updated its forecast after the Bank of England's latest decision to raise interest rates, and now expects the Bank of England to raise interest rates by 50 basis points each in August and September. However, our expectations are also in a state of just balance. If inflation and the labor market cool more than we expect, the MPC may choose to continue the "slow down", with rates expected to peak at 2.5% from the current 1.25% by November, before a rate-cutting cycle begins in mid-2023 , and expects to cut rates by 100 basis points over the next year.

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The Bank of England's quarterly survey released last week showed that the British public's inflation expectations for the year ahead have risen to 4.6%, the highest since 1999, up from 4.3% in a February survey; Expectations rose to 3.4% and 3.5%, the highest levels since 2013 and 2019, respectively.

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Given that the UK has completely banned the import of Russian energy, coupled with its domestic electricity price adjustment mechanism, which means that energy prices may last longer than other countries, the above forecast may still be conservative. Britain's high inflation problem is mainly due to the fiscal support measures announced by Chancellor of the Exchequer Sunak in May - to provide further help to households facing a heavy cost of living. In addition, the U.K. is also suffering from a severe shortage of workers to fill jobs, which is driving up wages in some industries substantially and could fuel inflationary fires.

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The market bearish momentum continued. The Bollinger Bands indicator channel fell in a step-like shock and fell. It rebounded after hitting the downward trend line many times, but the overall downward trend may continue. The Bollinger Bands indicator began to show signs of slow closing after the opening trend. , the low support is about 1.19324, the MACD indicator is in the short area to maintain shock and move down, and the RSI indicator is in the short area below the 50 equilibrium line, as shown in the figure:

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