The Boe's Intention to Raise Rates by 25 BPs Has Been Fully Reflected in Prices, with the Market Focus Shifted to Voting Proportions

Eva Chen

Forex

Central Bank

Economic

Summary:

The Bank of England will announce its monetary policy decision on March 23. Market participants focus on the size of any potential rate hikes and any signals of possible future rate hikes. Our base assumption is that the Bank of England will raise its policy rate by 25bps to 4.25%.

BUY GBPUSD

EXP

EXPIRED

1.21200

Entry Price

1.25200

1.19000

1.33800 +0.00093 +0.07%

Pips

EXPIRED

1.19000

1.24494

Exit Price

1.21200

Entry Price

1.25200

Fundamentals

Global markets have been volatile in recent days due to banking crises in the United States and Switzerland. Market discussions have focused on whether the Bank of England will pause rate hikes at this meeting. However, with these pressures easing somewhat, further policy tightening at today's meeting seems likely.

However, the focus of the market has now shifted to whether policy tightening will be further after this meeting. Our basic assumption is that this rate hike will be the last of the current rate hike cycle. According to the Bank of England's economic predicts, the UK is expected to fall into a mild recession and below-target inflation in the medium term, which is in line with the pause after the BoE's rate hike.

In our view, the comments of some key policymakers are also fairly balanced and looking for opportunities to turn to a pause. As President Bailey recently said in early March, "I would warn against implying that we have done raising bank rates or that we will inevitably need to do more".

In our judgment, a modest slowdown in inflation over the past few months has opened the door for the BoE to pause rate increases. However, the unexpected upside of the UK February inflation yesterday (Wednesday) called into question this pause, as UK headline CPI and core CPI surprisingly rose to 10.4% and 6.2% y-o-y respectively in February. The alarming upside in inflation could fuel the debate over the prospect of a rate hike by the Bank of England. Given the headwinds facing growth, the Bank of England's monetary policy committee has already divided on the magnitude of further rate hikes.

The Bank of England voted 7 to 2 to raise rates at its February meeting, with both opponents in favor of leaving rates unchanged. We would have liked the vote to be closer (6:3 or 5:4) to suggest that this rate hike could be the last. However, if the vote remains decisively in favor of a rate hike, then more rate hikes may follow.

In addition, the BoE also expressed that it would "continue to closely monitor signs of persistent inflationary pressures, including tight labor market conditions, the performance of wage growth, and services sector inflation." If there is evidence of more persistent pressures, then further tightening of monetary policy is needed." Therefore, if these persistent inflation risks are re-emphasized by the BoE, we believe this will signal further policy tightening."

All in all, we will expect closer voting fragmentation and a softening of BoE rhetoric in favor of a possible pause. In the absence of these factors, we will tend to adjust our outlook for further BoE tightening, which could be positive for the pound as well. However, if the Bank of England hints at the meeting today that it may soon pause its rate hike cycle, the pound could fall, albeit to a limited extent.

GBPUSD: The Boe's Intention to Raise Rates by 25 BPs Has Been Fully Reflected in Prices, with the Market Focus Shifted to Voting Proportions_1

Technical Analysis

The Bank of England is widely expected to raise interest rates by 25 basis points, which is more or less fully reflected in the price. Forward guidance will be the key to whether the pound can rally further.

We believe that after the 25 bps hike to 4.25% during the day, the BoE's tightening cycle may be over, implying that the increase this time is dovish. However, the market is now digesting more tightening. Closing the door to more rate hikes could push the pound lower.

Currently, GBPUSD remains neutral. The rally of the bulls from 1.1801 is retesting the 1.2445 resistance zone. A decisive break above this level will restore the larger gains started at 1.0351, which is targeting the Fibonacci Retracement of 1.2759.

On the downside, a break below the main support level of 1.2010 will officially announce the end of the rally since 1.1801. Prices will fall into a prolonged shock pattern.

Overall, we believe that the pound has fully priced in the 25 basis point rate hike expectation, but the decline is limited. The rise will continue after the correction. Operationally, it is recommended to mainly go long at lows.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.2120

Target Price: 1.2520

Stop Loss: 1.1900

Valid until: 2023-04-06 23:55:00

Support: 1.2081/1.2013/1.1939

Resistance: 1.2344/1.2392/1.2245

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