Rising Bank of England rate hike expectations support sterling

The pound rose against the dollar this week, benefiting from a weaker dollar. At the same time, the expected increase in interest rates by the Bank of England also supported the pound. Traders expected the Bank of England to raise interest rates by about 48 basis points on August 4, higher than the previous 45 basis points. With markets still grumbling over the Bank of England's failure to raise rates last November, this represents a sizable bet that the Bank of England is about to follow suit with a 50 basis point hike.

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The U.S. Commodity Futures Trading Commission CFTC foreign exchange business position report shows that as of the week of 2022-07-19 (hands) GBP long positions decreased by 4695 lots to 170053 lots. Although the pound is higher this week, the outlook for the UK economy is not optimistic, which still puts downward pressure on the pound in the future.

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Britain's economy unexpectedly expanded in May, expanding by 0.5% in May after falling 0.2% in April, the latest figures from the Office for National Statistics showed. Economists had forecast a 0.1% increase. . The Ministry of Finance's economic forecast report released in June showed that the market forecasts that the UK's GDP will grow by 3.6% in 2022 and 0.9% in 2023, down from 3.9% and 1.3% in May, and 4.4% and 2% in February. The Bank of England, the Bank of England, also previously predicted that UK GDP will fall into recession in the fourth quarter of 2022.

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Markets do not expect UK inflation to peak yet. The British government may raise the energy price ceiling again in October, and the CPI is expected to exceed 11% by then. To curb high inflation, the Bank of England announced last month that it would raise its benchmark interest rate from 1% to 1.25%. It was the fifth rate hike by the Bank of England since December, and the adjusted level was the highest since February 2009. The Bank of England also said it would be particularly vigilant against "more persistent inflationary pressures" and would respond forcefully if necessary.

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Bank of England Governor Andrew Bailey has turned "hawkish" and will raise interest rates twice in a row by 50 basis points. Bailey has actually hinted that the pace of rate hikes by the Bank of England will accelerate. Pickering said Bailey's vote would effectively prompt other members of the Monetary Policy Committee (MPC) to take more aggressive rate hikes. The Bank of England's accelerated pace of rate hikes will ultimately depend on a key vote by Bailey himself. He now sees a 50bps rate hike by the Bank of England as the most likely outcome (up from 25bps previously) at its Aug. 4 and Sept. 15 meetings.

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While Bailey did not give any signal about September, inflation may still be rising before a possible peak in October, when the household energy price cap is raised again, and the Bank of England is expected to hold at least 50 basis points at its second meeting rate of increase. But Berenberg believes that the Bank of England will soon stop raising interest rates and will cut rates in 2023. They expect bank rates to peak at 2.5% in November, not in the second quarter of 2023 as previously expected.

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They now forecast that the Bank of England will remain on hold in the first half of 2023 and continue to expect a 50 basis point cut in the second half of 2023 and another 50 basis points in the first half of 2024 to bring the bank rate to 1.5% by the end of 2024.

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The downward trend of the market bears is good, the low level is supported in the short term, reversed and sorted up, the top is suppressed and concerned about the shock around 1.21249, and the low level support is about 1.17562. The indicator is hovering below the 50 equilibrium line, as shown in the figure:

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