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BoE rate hike hits the pound

Friday 6 May, 2022

Daily Currency Update

As expected yesterday the Bank of England decided to raise the interest rate in the UK by 25bps, taking the UK Base Rate to its highest level in 13 years from 0.75% to 1%. Despite a hike that would usually be considered good for currency, the pound had its worst single day against the USD since September 2020 with a back drop of increased fears around stagflation. Governor Andrew Bailey went on to say that the UK may experience peak inflation a little later than some other countries with inflation possibly rising to 10% this year and growth is expected to “slow sharply” in the wake of the Russia-Ukraine war.

Key Movers

After the steep fall in the demand for the US dollar after Wednesdays FOMC meeting, we saw a complete reversal on Thursday as the dollar made an incredibly strong recovery to a 20 year high. Vs the pound yesterday the dollar was up 2% during parts of the day with the pair currently sitting at 1.2320 but falling into the 1.22s during the Asian session this morning. This was supported by a sharp rise in US yields after the Federal reserve raised the rates by 50bps on Wednesday. Looking ahead today the main release across all markets is the US labour market report. We are forecasted to see a 391K rise across April while the unemployment rate is expected to push slightly lower from 3.6% down to 3.5%. From the Eurozone we saw ECB member Robert Holzmann state that discussions around rate hikes will commence in the ECB meeting scheduled for June. Many believe that the markets are pricing in up to 90bps worth of hikes from the ECB by the end of the year which may be when we see the Euro gain some ground back on its peers. For now though EUR/USD continues to trade around the 1.05 handle.

Expected Ranges

  • GBP/USD: 1.2220 - 1.2390 ▼
  • GBP/EUR: 1.1630 - 1.1765 ▼
  • GBP/AUD: 1.7340 - 1.7469 ▲
  • EUR/USD: 1.0470 - 1.0610 ▲