BoE Holds Rate at 4.75%, Faces Inflation Challenges Amid Slowing Growth

The Bank of England (BoE) held its interest rate steady at 4.75% on Thursday, reinforcing its cautious and measured approach to monetary easing amid a complex economic landscape marked by inflationary pressures and slowing growth. The decision was not unanimous, with a notable 6-3 split in the Monetary Policy Committee (MPC). This growing divide, highlighted by Deputy Governor Dave Ramsden and two other members favoring a 0.25% rate cut, signals rising concern among policymakers about the trade-offs between controlling inflation and supporting a stagnating economy.

Inflation, which rose to 2.6% in November, remains a central challenge. The increase, driven by stronger-than-expected wage growth and fiscal stimulus from the Autumn Budget, pushes inflation further above the BoE's 2% target. Projections now suggest inflation will only return to target by early 2027, significantly later than previously expected. While services inflation—a key indicator of underlying pressures—held steady at 5%, broader price increases, especially in transport and manufacturing, signal persistent cost challenges. These dynamics have left the BoE in a difficult position, balancing the need to curb inflation without exacerbating economic weakness, as GDP has contracted for two consecutive months, and overall growth in 2024 is forecast at a subdued 1.1%.

Compounding the complexity is the divergence between global monetary policies. The Federal Reserve’s recent 25-basis-point rate cut, coupled with its signal of a more cautious approach to easing in 2025, contrasts sharply with the BoE’s restrained stance. This divergence has amplified market uncertainty, with UK bond yields initially spiking after the Fed’s announcement but stabilizing as investors recalibrated their expectations for the BoE. Markets now price in only modest rate cuts for 2025, with limited chances of a February reduction and a total of two cuts by year-end.

The UK economy faces mounting challenges as businesses report the sharpest staffing cuts and confidence drops since the pandemic, largely attributed to the tax hikes in Chancellor Rachel Reeves' October 30 budget. Surveys, including the S&P Global Flash Composite PMI and MakeUK’s quarterly report, highlight widespread restructuring, reduced hours, and non-replacement of staff, with employment drops mirroring levels last seen during the 2009 financial crisis. These changes reflect an economy grappling with higher costs and constrained growth.

Meanwhile, the manufacturing sector continues to deteriorate, with output hitting its lowest since August 2020, according to the Confederation of British Industry (CBI). Domestic confidence has collapsed due to increased costs from the budget, leading to widespread project cancellations and reduced orders. Firms also forecast weaker future output, exacerbating concerns about Britain’s economic resilience.

The U.S. dollar remained strong near its two-year high as the Federal Reserve's latest rate cut signaled a cautious approach to monetary easing in 2025. This hawkish stance, driven by concerns over inflation, limited expectations for rate reductions to just two next year, down from earlier projections of four.

The Fed's rate cut to a 4.25%-4.50% range aligns with a tightening cycle aimed at curbing inflation. Notably, the Fed anticipates just 50 basis points of cuts in 2025, reflecting an upward adjustment to the long-run policy rate target. Analysts, such as those at Macquarie, predict the rate-cutting cycle could conclude as early as March or May, stabilizing at 4.0%-4.25%.

Supporting this outlook, the U.S. economy displayed resilience, with Q3 GDP revised upward to an annualized 3.3% growth rate, buoyed by robust consumer spending and stronger export growth. Consumer spending, the engine of economic growth, rose at an impressive 3.7% rate, underscoring the economy's continued strength despite global uncertainties. The labor market, too, showed resilience, with jobless claims dropping more than expected and signaling only a gradual slowdown. Fed Chair Jerome Powell expressed confidence, emphasizing that the U.S. economy remains robust and has successfully avoided a recession.

Housing and automotive markets presented mixed signals. Mortgage rates ticked higher, following three consecutive weeks of declines, reflecting the Fed's cautious stance. However, home sales surged to an eight-month high in November, while vehicle sales are projected to rise in December, supported by deeper discounts. This could result in the GBP/USD pair likely trading within its current range, with a slightly higher tendency toward the upper end of the range during this period.

Data for Technical Analysis (15Min) CFD GBP/USD

Resistance : 1.2484, 1.2485, 1.2488

Support : 1.2480, 1.2479, 1.2476

15Min Outlook

Source: TradingView

Buy/Long 1 If the support at the price range 1.2474 - 1.2480 is touched, but the support at 1.2480 cannot be broken, the TP may be set around 1.2484 and the SL around 1.2471, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2484 - 1.2490, TP may be set around 1.2497 and SL around 1.2477, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2484 - 1.2490 is touched, but the resistance at 1.2484 cannot be broken, the TP may be set around 1.2478 and the SL around 1.2493, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2474 - 1.2480, TP may be set around 1.2470 and SL around 1.2487, or up to the risk appetite.       

Pivot Points Dec 20, 2024 03:57AM GMT