Home Daily Commentaries Sterling lower after BoE rate hike

Sterling lower after BoE rate hike

Daily Currency Update

The Bank of England hiked its interest rate by half a point yesterday taking the base rate to 3.5%, the highest level in 14 years, in a bid to cool inflation. At 10.7%, the inflation rate remains more than five times higher than the bank’s 2% target. However, November was the first glimmer that soaring price rises were starting to come down. The ninth consecutive rate hike came as no surprise Thursday and a fall from the previous month’s 75 basis point hike to 50 basis points similarly offered no shocks, but a breakdown of votes by Monetary Policy Committee members showed policymakers divided. Some voted for a 75-basis point rise, while others said now was the time to stop tightening monetary policy altogether. It was this divide that weakened the Pound. GBP/USD had been trading above 1.2400 at the start of Thursday, but the currency pair has since fallen below 1.2150. GBP/EUR had been above 1.1600 yesterday but tested a fall below 1.1400 earlier this morning.
Earlier Friday, U.K. retail sales fell 0.4% on the month in November, a drop of 5.9% on the year, and a disappointing number showing how consumers are struggling with discretionary spending as prices soar. We have also seen flash UK manufacturing and services PMI. Service beat expectations and came in at 50, showing expansion, but manufacturing missed the forecast and dropped from the previous release. The Sterling hasn’t been supported by these releases and the losses against the USD and EUR has been maintained.

Key Movers

The European Central Bank eased the pace of its interest rate hikes on Thursday, tightening by 50 basis points, but President Christine Lagarde also signalled further significant tightening remained ahead in the battle against inflation. Significant rises at a steady pace are now expected from the European governing council judges as they tackle inflation back down to the 2% medium-term target. This hawkish tone prompted investment banks to lift their forecast for how high Eurozone interest rates will go, meaning economic data will be closely monitored in the near term to gauge inflationary pressures and growth signals for clues of future hikes. EUR/USD has maintained its recent rise above 1.0600 and GBP/EUR dropped as low as 1.1400 earlier this morning.

Expected Ranges

  • GBP/USD: 1.2130 - 1.2250 ▼
  • GBP/EUR: 1.1400 - 1.1510 ▼
  • GBP/AUD: 1.8130 - 1.8250 ▲
  • EUR/USD: 1.0590 - 1.0710 ▲