GBP/USD rallies towards 1.2350 post-BoE’s hike, on soft US dollar

• The Bank of England hiked 25 bps and initially tumbled the pound, though later rallied due to a weaker US dollar.
• The BoE decided not to give any forward guidance regarding the pace and time of monetary policy adjustments.
• Negative US housing data fueled speculations that the US might be headed into a recession.

The British pound is rallying sharply following a 25 bps rate hike by the Bank of England (BoE), which now plays catch up vs. the US Federal Reserve, with the former lifting rates to 1.25%, while the latter surpassing the BoE, with the Federal funds rate (FFR) at 1.75%. Nevertheless, despite the previously mentioned, the GBP/USD is up 1.47%, trading at 1.2352 at the time of writing.

Market sentiment remains negative, as portrayed by US equities recording losses between 2.70% and 5%. Fears that the Federal Reserve might trigger a recession after reacting late to high inflation figures loom.

The BoE hikes rates, though expect UK’s economy to contract

On Thursday, the Bank of England lifted rates by 0.25%, initially sending the GBP/USD towards daily lows at around 1.2050. Nevertheless, GBP/USD buyers lifted the pair around that area, which is rallying close to 200 pips in the day.

In its monetary policy statement, the BoE updated its projections about CPI and expects inflation to peak at 10% in Q4 of 2022. The Monetary Policy Committee (MPC) estimates inflation would tame at around the 2% target in two years as external factors dilute. Concerning UK’s growth, the bank expects a contraction in Q2, by -0.3%, weaker than anticipated in its May report.

It’s worth noting that the statement gave no forward guidance regarding further hikes in the near term. The BoE emphasized that the “scale, pace and timing will reflect the Committee’s assessment of the economic outlook and inflationary pressures.”

Despite the aforementioned, some banks in the street expect the BoE would lift the Bank’s Rate to 2.25%.

In the meantime, bad US housing economic data further raise speculations of a recession in the US. US House Starts shrank by -14.4%, while Building Permits followed suit, down -by 7%. Additionally, the Philadelphia Fed Manufacturing Index for June showed signs of a slowing US economy contracting by -3.3, much lower than estimations of 5.5.

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