Pound Sterling Drops As BoE’s Bigger Rate Hike Threatens Growth Prospects

The Pound Sterling (GBP) has faced selling pressure as the ultra-hawkish interest rate decision by the Bank of England (BoE) will impact economic activities. The GBP/USD pair has dropped as BoE Governor Andrew Bailey has surprisingly raised interest rates by 50 basis points to 5%, considering the severe persistence in United Kingdom inflation.

United Kingdom’s inflation remained hotter than expected in May as labor market conditions have tightened further and food price inflation has not peaked yet. Meanwhile, UK’s core inflation has printed a fresh new high of 7.1%, which has tilted expectations of market participants in favor of a fat interest rate hike from the central bank.

Daily Digest Market Movers: Pound Sterling Drops Despite Extremely Hawkish Boe

  • The BoE has unexpectedly raised interest rates by 50 basis points (bps) to 5%.
  • A bulky rate hike by the BoE will threaten the economic outlook.
  • The central bank went with a bigger hike as UK’s May inflation data has become more persistent.
  • UK inflation figures were surprisingly higher than expectations as monthly headline CPI for May expanded at a pace of 0.7%, matched April’s rate but remained higher than the estimated speed of 0.5%.
  • Annualized headline inflation remained steady at 8.7%, while the market anticipated a deceleration to 8.4%. At the same time, core UK CPI that excludes oil and food prices printed a fresh high of 7.1% versus expectations of steady performance.
  • UK households will face high pressure amid a wide deviation between 8.7% inflation and 6% earnings rate.
  • Hot inflation numbers seem uncomfortable for UK PM Rishi Sunak and BoE Governor Andrew Bailey as the former promised to halve inflation by year-end, and investors believe that the latter is failing to do justice with his job of achieving price stability.
  • UK FM Jeremy Hunt is reluctant to cut taxes as it could propel already elevated inflationary pressures and undermine hawkish monetary policy’s impact.
  • A pullback move in the US Dollar Index could be faded as Federal Reserve (Fed) policymakers delivered dovish commentary.
  • Atlanta Fed President Raphael Bostic cited that the central bank should not raise interest rates further, or it would risk “needlessly” sapping the economy’s strength.
  • Chicago Fed Bank President Austan Goolsbee favored allowing current interest rates the required time to show their impact on the economy.
  • As per the CME Fedwatch tool, more than 70% chances still favor a 25 bps interest rate hike in July to 5.25-5.50%.
  • Fed Chair Jerome Powell cited in his testimony at Congress that bringing down inflation to 2% has a long way to go.
  • Jerome Powell also confirmed that all policymakers have agreed that more rate hikes are required this year.

Technical Analysis: Pound Sterling Shows Broader Volatility Contraction

Pound Sterling has faced selling pressure above the round-level resistance of 1.2800. The corrective move in the Cable has found intermediate support near the 10-period daily Exponential Moving Average (EMA) at 1.2700. Broadly, the Pound Sterling is approaching north in a Rising Channel chart pattern in which market participants consider each pullback a buying opportunity.

Bullish bias for the Cable will strengthen if it climbs above the fresh annual high around 1.2850.  The bullish bias could be faded if Cable drops below the previous month’s high around 1.2669.

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