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How to Make the Most of the Pound's Bounce as further Hikes Loom

  • Is a rate hike factored in?

  • What is The Bank of England's Monetary Policy Committee (MPC)

  • How does the meeting influence the markets?

  • How to trade the bank of England's rate decision in forex

Tomorrow we have a vital decision from the Bank of England, who will be juggling a potential recession in the UK whilst fighting continued high inflation. Historically rate hikes would curtail inflationary pressure. Will further hikes sink the economy and continue the UK's woes after a recent positive bounce?

GBP economic calendar  interest rate decision
GMT tomorrow

The pound has received a boost from the U.S. Federal Reserve when the central bank raised rates by 25 basis points but signalled that it may stop there and a softening of the latest CPI inflation data today.

By contrast, many analysts think the Bank of England will have to keep raising rates, given that inflation is much stronger in Britain - running at 10.1% year-on-year in March, compared with 5% in the United States.

The question is, how will further rate hikes move the markets and will Sterling rise or fall?

Before we look into potential ramifications, how are interest rates set?

The Bank of England's Monetary Policy Committee (MPC) decides on the interest rates in the UK. In simple terms, the MPC meets eight times a year to assess the state of the economy and determine what interest rate would best balance the government's two main objectives: to keep inflation low and stable, and to support economic growth and employment.

The committee examines various economic indicators, such as GDP growth, unemployment rates, and inflation data, to evaluate the current state of the economy. They also consider global events, such as changes in trade policies or political events that may impact the UK economy.

Based on this analysis, the MPC decides whether to increase, decrease, or leave the interest rates unchanged. The committee aims to set interest rates at a level that will help maintain price stability, while also supporting sustainable economic growth.

It's worth noting that the decision-making process of the MPC is complex and influenced by a wide range of factors, and the process is not always predictable. The committee's actions can have a significant impact on the economy, affecting borrowing costs, investment decisions, and overall consumer and business confidence.

Whilst most believe a quarter-point rate hike by the BOE tomorrow is a given, they may well be in for a surprise, and if you are a trader, you know what surprises mean in the market.

Even if the rate decision is as most analysts expectations, what is said after is the most important thing, "the devil is in the detail" of the MPC’s forward guidance.

What the Bank of England does on Thursday doesn’t matter nearly as much as what the Monetary Policy Committee signals about its future intentions. A 25 basis-point increase taking its official interest rate to 4.5% looks inevitable to most, in what would be its 12th consecutive hike from near zero just 18 months ago.

Bloomberg Opinion columnist Marcus Ashworth says he’d caution against the central bank maintaining a hawkish stance based on backward-looking data.

“Financial conditions have become noticeably less stable. Things are starting to break in various parts of the global financial world amid the relentless pace of monetary stimulus withdrawal.”

He adds the chances of the committee becoming increasingly divided are rising, which would make it even harder to get its monetary policy message across. And if another crisis erupts, the MPC would find its credibility under strain as the signs of financial stress are now “patently obvious.”

Of the nine MPC members, two are likely to repeat their call from the previous meeting for no change in rates. But the chances of the committee becoming increasingly divided are rising, which would make it even harder to get its monetary policy message across. The BOE has come under criticism from many sides — particularly the House of Lords economic affairs committee — for its failure to act swiftly enough to curb inflation. If another crisis erupted, it would find its credibility under considerable strain, as the signs of increasing stress are patently obvious.

To be fair, the economic outlook is about as unclear as it’s ever been. But that’s all the more reason not to be held hostage by backward-looking data. Instead, perhaps the BOE could seek to instil confidence in consumers and companies by adopting a neutral, though flexible, stance for the rest of the year.

What could push GBP/USD higher?

  • BoE policy could increase the attractiveness of the pound

  • Weakening UK inflation eases pressure on the pound

  • Politics might support the pound

  • Outlook for the UK economy appears rosy

  • The Bank of England's rhetoric remains hawkish

  • BoE's path to normalisation has just been made fractionally easier

  • Higher UK yields are on the horizon

  • Central banks get eager to taper.

What could push GBP/USD lower?

  • Gloomy forecast point to ongoing pressure on the Pound

  • Protracted economic recession, BoE rate cuts to begin much earlier than financial markets are priced for

  • Lending in Britain slows

  • BoE rate to lag behind the Fed and market participants' expectation

  • Sterling suffers from liquidity outages

  • Protracted economic recession, BoE to underdeliver market's rate hike expectations

  • BoE signals that the peak interest rate will be lower

  • Tight UK labour market making BoE job harder.

How to trade the bank of England's rate decision in forex

Trading the Bank of England's (BOE) rate decision in forex can be a potentially lucrative opportunity for traders, but it requires a thorough understanding of the market and the factors that influence central bank decisions. Here are some steps to consider:

  1. Keep an eye on economic data: Economic indicators such as GDP growth, inflation, and employment figures are closely watched by the BOE and can have a significant impact on their decision-making process. Stay up-to-date with the latest economic releases and forecasts to anticipate the BOE's likely stance on monetary policy.

  2. Monitor BOE statements and speeches: The BOE regularly releases statements and speeches that provide insights into their monetary policy stance. These communications can provide clues about future policy changes and market expectations.

  3. Watch for market expectations: The market often prices in rate changes ahead of the BOE's announcement, so it's important to keep an eye on market expectations. A significant deviation from these expectations can lead to volatile price movements.

  4. Determine your trading strategy: There are different trading strategies that can be used to trade the BOE rate decision, such as taking a position ahead of the announcement, waiting for the announcement and then trading the reaction, or implementing a combination of both.

  5. Manage your risk: Trading the BOE rate decision can be a high-risk strategy, so it's important to manage your risk appropriately. This includes setting stop-loss orders, managing position sizes, and having a clear exit plan.

In summary, to trade the BOE rate decision in forex, traders should closely monitor economic data, BOE statements, and market expectations, determine their trading strategy, and manage their risk effectively. It's also important to have a solid understanding of the forex market and the factors that influence currency prices.

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