FOMC delivered a 50 basis point rate hike, in-line with market expectations, and announced the beginning of balance sheet run-off in June. As the pace of monthly reductions in the balance sheet was lower than expected and Powell said that 75 bp rate hikes are not actively considered, equity markets rallied and USD dropped. Now market attention shifts to another major central bank – Bank of England – as it is scheduled to announce its monetary policy decision today at 12:00 pm BST. Market expects another 25 basis point rate hike that will push the main interest rate to 1.00%.
This would be a fourth rate hike in a row, highlighting BoE’s efforts to combat inflation that has recently reached a 30-year high at 7% YoY. While the hike looks almost certain, it is expected that it will be a “dovish hike”. BoE needs to to be careful with hiking in order not to push the UK economy into recession. As such, emphasis will likely be made that further rate hikes will be of the same magnitude – 25 bp rather than 50 bp as Fed did. However, it is expected that today’s hike will be passed with 7-2 votes, meaning one more dissenter compared to March hike (8-1). This, in turn, may hint that opposition to further tightening may continue to increase.
Taking a look at GBPUSD chart at D1 interval, we can see that the pair has recently stumbled to the support zone, marked with 61.8% retracement of the post-pandemic upward move (1.2500 area). The drop was driven by USD strengthening. A post-FOMC weakness in USD that surfaced yesterday allowed the pair to bounce off the area but majority of that move has been erased today already. Should BoE strike a cautious tone regarding future rate hikes, GBPUSD may experience some weakness and a retest of 1.25 zone may occur.