Bank of England slows pace of rate hikes pressures pound

Sterling fell against the dollar this week, with the Bank of England slowing down the pace of interest rate hikes to put pressure on the pound. The market expects that the Bank of England may slow down the pace of interest rate hikes to 25 basis points at its next meeting in February 2023, as mortgages are expected to slow down. As lending rates rise, UK consumer spending will fall.

The U.S. Commodity Futures Trading Commission CFTC foreign exchange non-commercial position report shows that as of 2022-12-13, the (hand) long position in the pound increased by 3,469 hands to 32,008 hands; the Bank of England's dovish rate hike put pressure on the pound. The Monetary Policy Committee voted 6-3 to raise interest rates by 50 basis points, pushing the benchmark interest rate to 3.5%, which is also a new high in nearly 14 years.

Prospects for a “Christmas rally” in markets, or a year-end rally, dimmed, with most global central banks tightening policy. The Bank of England and the European Central Bank indicated that this round of interest rate hike cycle will last for a long time. The euro looked set to extend gains against the pound following policy decisions from the European Central Bank and the Bank of England.

The ECB's decision was more "hawkish" than expected, the start of quantitative tightening was earlier, and the inflation forecast was higher. The ECB also expects further sharp rate hikes at a steady pace, suggesting more upside around the peak in rates. Meanwhile, the Bank of England appears to be getting closer to getting things done.

The European Central Bank stepped up its tightening efforts to support the euro. On the 15th, the European Central Bank announced that it would raise the three key interest rates in the euro area by 50 basis points, promised to continue to raise interest rates sharply, and announced a quantitative tightening plan at the same time. Since July this year, the European Central Bank has raised interest rates four times in a row to curb inflation, raising interest rates by 250 basis points in total.

The Bank of England's dovish rate hike weighed on the pound. The Bank of England announced that the Monetary Policy Committee voted 6-3 to raise interest rates by 50 basis points, pushing the benchmark interest rate to 3.5%, which is also a new high in nearly 14 years.

Among the 9 members of the MPC of the Bank of England, apart from 6 who voted in favor, 2 members proposed to suspend interest rate hikes, believing that the current borrowing costs are high enough to curb inflation, and the effect of 9 consecutive interest rate hikes has not yet been fully realized. It is transmitted to the side of enterprises and households; another member proposed to maintain the rate increase rate of 75 basis points, emphasizing that the central bank needs to combat "inflation psychology embedded in wage settlement and inflation expectations".

The Bank of England predicts that GDP may shrink by 0.1% in the fourth quarter of 2022, which is slightly better than the economic forecast in November. But household consumption remained weak, most market indicators continued to deteriorate, and surveys of investment sentiment weakened further. The Bank of England also predicted that the impact of the British government's energy subsidies and tax increase policies on inflation would be relatively small.

The UK government's plan to cap energy costs may ease price pressures in the short term, but could further inflate the UK's current account deficit. Britain's current account as a percentage of GDP has been stable at 1%-5% for decades, but will expand to 8% in the first quarter of 2022. If gas prices continue to rise as Russia cuts off energy supplies to the continent, the cost of the energy subsidy package could skyrocket, potentially saddling government balance sheets with huge losses and sending the pound tumbling against the dollar.

The daily K-line chart of GBP/USD shows:

The bullish momentum maintains an upward trend, the channel continues to fluctuate and rise, the short-term bullish sentiment continues to rise, the high level is short-term resistance and retracement, the market bearish sentiment begins to wait for an opportunity to enter the market, the upper suppression focuses on around 1.24961, the low support focuses on around 1.19083, the MACD indicator is in the bullish area, and the RSI The indicator is hovering weakly above the 50 balance line, as shown in the figure:

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