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GBP/USD spikes after BoE surprises with a rate hike

It looks the Pound could rally further, supported by the BoE decision and weaker USD.

The Pound was strongly bid on Thursday, following the latest Bank of England decision. As a result, the GBP/USD pair rose circa 100 pips to 1.33550 during the London session, trading at the highest level in three weeks.

BoE hikes rates

Earlier today, the Bank of England hiked rates, defying expectations, and brought the primary rate to 0.25% . Eight MPC members voted for a rate hike (versus two expected), nearly a unanimous decision.

Investors anticipate the central bank to continue hiking in 2022, with three more rate hikes currently priced in by the markets.

Inflation in the UK continues to rise (as everywhere else in the world). This week’s data showed annual inflation surged to 5.1% in November from 4.2% the month before , coming in above consensus expectations of 4.8% and the Bank of England’s forecast for 4.5%. It was the highest annual rate since September 2011.

That might have been the reason why the BoE decided to start the lift-off. Still, COVID cases are rising again, prompting the government to tighten measures.

Policymakers said more “modest” tightening is likely needed as inflation heads toward a peak likely to be around 6% in April. Meanwhile, the bank revised down their GDP forecasts for 2021 4Q by about 0.5% since the November Report (likely due to Omicron concerns).

From other news, France announced that it will close borders for UK tourists from Saturday morning, even though many scientists are now claiming the Omicron variant to be much weaker than previous variants.

Fed also hawkish, but USD dives

On Wednesday, The Fed sounded hawkish, and Jerome Powell announced that the central bank would double the rate of its tapering of bond purchases amid continued rising inflation. He further outlined that the Fed will likely hike rates three times in 2022. Nevertheless, the USD dropped notably after the decision, ending its short-term uptrend in many pairs.

Technically speaking, the GBP/USD pair has broken above the short-term bearish trend line from November highs, confirming the short-term reversal. The next target in this relief rally is expected at 1.3415, where September lows are. Other significant selling levels are at 1.35 and 1.36.

Alternatively, if the price returns below 1.33 again, we could see a quick decline toward the 1.32 threshold.

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