Pound edges higher, markets eye BoE

The British pound is in positive territory today and briefly climbed above the 1.22 line. In the European session, GBP/USD is trading at 1.2185, up 0.18% on the day.

Will BoE tighten by 50bp?

The Bank of England meets on Thursday, and a 50bp hike looks likely, especially after hints from Governor Bailey to that effect. In today’s business climate of high inflation and central banks aggressively raising rates, such increases are no longer viewed as ‘massive’ or ‘supersize’. Still, it should be remembered that the BoE has not raised rates by 50bp since 1995, so such a move would be significant, even if it has been priced in by the markets. This would bring the Bank Rate to 1.75%, still well below the rate levels at the Federal Reserve and many other major central banks.

In June, the MPC voted 6-3 to raise rates by 25bp, suggesting that Thursday’s decision will not be unanimous either. If the majority wins six or more votes, it would send out a strong message that the BoE is prepared to continue hiking and another 50bp move would be a strong possibility in September, which would be bullish for the pound. A close 5-4 vote might result in less hawkish wording in its comments and would signal that we may be getting close to the end of the rate-tightening cycle and the pound could weaken.

The BoE is under heavy pressure to alleviate the cost-of-living crisis in the UK, with inflation rising to 9.4% in June, up from 9.1% in May. Inflation expectations are also accelerating, which will make it difficult for the BoE to curb inflation. The danger with a faster pace of tightening is that it could result in the UK economy, which is already showing signs of slowing, tipping into recession. Central banks have circled inflation as public enemy number one, even if the price is a recession. Investors, however, are jittery about the “R” word, and any indications that the UK is in a recession would likely sour sentiment towards the British pound.

GBP/USD technical

• GBP/USD faces resistance at 1.2295, followed by a monthly resistance line at 1.2362.

•  There is support at 1.2128 and 1.2061.