Sterling is having an extremely choppy day today following the latest Bank of England interest rate meeting.
As widely anticipated, they raised interest rates by 0.25% (to 1.25%) and there were three dissenting policymakers voting for a 0.5% hike. Leading into the decision, however, some traders started to expect that a larger 0.5% hike was on the cards (after large hikes from Fed and the SNB) which led to a large rally in the pound pre-decision. Then we saw an immediate drop back as the 0.25% was confirmed. However, after further digestion of the meeting, traders then took it back the other way with Sterling climbing back towards the highest levels of the week!
The accompanying statement from the BoE showed that inflation is expected to be over 9% in the next few months and is expected to rise to above 11% by October. The Bank said that they will take the ‘necessary actions’ to return inflation to their 2% target but the scale, pace, and timing of any rate hikes will reflect the assessment of the economic outlook and inflationary pressures. So, although the BoE are taking a steady approach at the moment, the money markets are expecting them to be more aggressive later in the year, which has caused Sterling to be bought back (for now).
Last night the US Federal Reserve raised interest rates by 75 basis points – the largest hike since 1994. Chairman Powell suggested that a further 75 basis point rise would happen in the July meeting, although he did say that he didn’t expect further moves to be common following that. This decision has contradicted previous statements that they were not considering such a large hike, however, following May’s inflation report, the Fed were forced to show it was working to control rising prices.
As a result, the GBP/USD is up nearly 2-cents from the low we’ve seen today and trades at the highest levels since Monday morning. The GBP/EUR is up over 2-cents from yesterday’s low and hit the highest levels of the week earlier.