Bank of England's Surprise Rate Hike Signals Prolonged Inflation

The Bank of England surprised investors by raising interest rates by half a percentage point, citing significant news indicating that Britain's high inflation would persist for a longer period. This decision marked the largest increase since February and pushed the main interest rate to 5%, the highest since 2008. The committee noted that the second-round effects of external cost shocks on domestic prices and wages would take longer to unwind than they took to emerge.

Financial markets had anticipated further rate hikes by the Bank of England, with estimates suggesting rates could reach 6%, the highest since 2001. Following the rate increase, there was a nearly 50% chance that Bank Rate would peak at 6.25% by the end of the year.

Britain's economy has faced various challenges, including the impact of Brexit, the COVID-19 pandemic, and rising gas prices due to Russia's invasion of Ukraine. Despite these obstacles, the country managed to avoid a widely predicted recession thus far in 2023. However, economic growth has been sluggish, and the Bank of England's forecasts indicate a minimal growth rate of 0.25% for the year.

Inflation in the UK remained at 8.7% in May, defying expectations of a slowdown. This added pressure on the Bank of England just one day before it was expected to raise interest rates for the 13th consecutive time.

The central bank had previously forecasted that inflation would decrease to slightly over 5% by the end of the year and eventually fall below its 2% target in early 2025. While a significant drop in inflation is expected as energy prices decrease from their peaks in the previous year.

Core inflation, which excludes volatile prices, reached a 31-year high in May. Wage growth in the UK is expected to continue at a rate of around 6%, due to a shortage of available workers. Historically, British wage growth has only slowed after a significant rise in unemployment. To achieve this slowdown in the current labor market, economists estimate that the Bank of England would need to engineer a recession that pushes unemployment to around 6.0%-6.5%, compared to the current rate of 3.8%.

A Bank of England survey revealed that public expectations for inflation in the next 12 months decreased in May, dropping from 3.9% in February to 3.5%. Expectations for inflation in five years remained steady at 3.0%. In terms of public finances, Britain's public sector net debt surpassed 100% of GDP in May due to higher-than-expected borrowing. This marked the first time since 1961 that debt stood above this threshold.

On the other hand, the U.S. dollar and Treasury yields rose following statements from Federal Reserve Chair Jerome Powell indicating the potential need for more U.S. interest rate hikes to control inflation. Additionally, U.S. data showed that the number of people filing for state unemployment benefits remained elevated for the third consecutive week, potentially indicating a softening labor market. As a result, it is anticipated that in the short run, this may lead to the pound's stability and a minor appreciation against the US dollar. The difference in returns between the two economies, which is not too far off, is projected to keep the pound's gain somewhat muted.

Data for Technical Analysis (5H) CFD GBP/USD

Resistance : 1.2751, 1.2753, 1.2758

Support : 1.2741, 1.2739, 1.2734                  

5H Outlook

Source: Investing.com                                              

Buy/Long 1 If the support at the price range 1.2736 - 1.2741 is touched, but the support at 1.2741 cannot be broken, the TP may be set around 1.2752 and the SL around 1.2732, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2751 - 1.2756, TP may be set around 1.2764 and SL around 1.2737, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2751 - 1.2756 is touched, but the resistance 1.2751 cannot be broken, the TP may be set around 1.2740 and the SL around 1.2760, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2736 - 1.2741, TP may be set around 1.2728 and SL around 1.2755, or up to the risk appetite.       

Pivot Points Jun 23, 2023 02:35AM GMT

Sources: Investing 1, Investing 2