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GBP/USD shows volatility after BoE hikes rates

Another major central bank joined the "dovish hike" club, sending the Pound lower.

As anticipated, the Bank of England raised the overnight rate by 50 basis points, reaching 4%, the highest level since autumn 2008. As a result, the Pound had a seesaw reaction – rallying first, then falling sharply, only to erase most of the losses and return to the pre-release levels.

Another dovish rate hike

Following Wednesday’s dovish FOMC meeting, today’s BoE meeting followed suit. Two members supported maintaining the current rates. Despite the fact that the Monetary Policy Committee (MPC) is comprised of nine members, it is vital to highlight that just one member voted in December to keep borrowing costs constant. Another MPC member sought 25 bps and now wanted to hold. So the minority in support of a halt to increasing rates is increasing.

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In light of the remarks, the Committee maintained its view that inflationary risks are “well to the upside.” At the same time, the committee removed language from its statement indicating it could act “forcefully” in the future, adding that additional rate hikes would be required only if there were new indications that inflation would remain too high for too long.

The BoE also stated that if there is “evidence of more persistent pressures, then further tightening of monetary policy would be required,” as opposed to the previous statement that a “majority” of the Committee believes that additional Bank Rate increases may be required for a maintainable come back of inflation to target.

The revised statement, which makes additional hikes dependent on harmful inflation data, implies that interest rates may peak at the current rate of 4%, lower than the 4.5% projected by the financial markets.

In addition, the BoE cut its inflation estimates, predicting that price increases will conclude 2023 at just under 4%, a significant decrease from the earlier forecast of over 5%. 

Daily chart still seems bullish

For now, the GBP/USD pair, also known as the cable, remains capped by the strong resistance of previous highs near 1.2440. However, as long as the anti-USD mood prevails in the markets, the Pound could accelerate higher, eventually breaching that resistance and rising above 1.25.

On the downside, the initial support is at 1.2270 (the 21-day moving average). Below, bids are expected to defend the psychological 1.20 level, which coincides with the 200-day moving average (the blue line).

GBP/USD index daily chart

GBP/USD index daily chart, source: author´s analysis, tradingview.com

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