BoE leaves rates unchanged but hawkish tone sees GBP/USD testing 1.33

The Bank of England (BoE) kept rates unchanged on Thursday as widely expected. The vote split came in at 8-1, with just one dovish dissenter. Markets had been expecting a 7-2 split. Comments attached to the release shows Governor Bailey is careful not to cut too much or too quickly, which gave the released a slightly hawkish tone. This led to a strong move higher in UK assets, giving confidence to investors that the economy is holding up well. GBP/USD is testing 1.33 after breaking above last month’s high. Meanwhile, the FTSE 100 has also regained a bullish bias but is pulling back slightly from its daily highs. 

GBP/USD & FTSE 100 1-hour charts

Past performance is not a reliable indicator of future results.

Money markets have also noted the hawkish tone from the release moving to reduce the amount of easing expected this year. There are currently 41bps of cuts priced in by December, versus 50bps prior to the meeting.  

On Wednesday, the Federal Reserve opted for a 50 basis point cut to start their cutting cycle, tasking markets slightly by surprise. A cut was expected, no doubt about that, but the latest data had seen money markets lean in favour of a smaller 25 bps cut to get things going. The initial reaction was as expected given the magnitude of the decision. Stocks and commodities jumped higher, whilst the dollar and yields dropped. But the risk-on mood didn’t last long, and markets started to reverse as Powell took the stand for further updates. There could be two reasons as to why the mood shifted. One, the bleaker outlook on the economy given the aggressive lowering of the dot plot chart could have sparked some concern amongst investors, even if gold suffered in the process. Or two, markets realised that the Fed’s dot plot, whilst showing significant adjustment, anticipates eight rate cuts for next year, below the ten anticipated by markets. This misalignment in expectations could have driven the dollar and yields higher, weighing on risk appetite towards the latter part of the session. 

For now, GBP/USD seems to remain in a bullish formation as the playoff between central bank policies plays in the pounds favour, with more cuts expected from the Fed than the BoE. The immediate resistance will likely be the 1.33 mark as a psychological level, but once cleared we could see buyers aiming for the March 2023 highs around 1.3438. 

GBP/USD daily chart

Past performance is not a reliable indicator of future results.