GBP/USD plummets below 1.2300 post-BoE’s decision, US data

• GBP/USD dropped after the Bank of England lifted rates and gave no signals for further increases.
• The BoE foresees a shallow recession in the UK and expects inflation at around 4% by year’s end.
• US labor market data portrays the tightness of the job markets, with traders eyeing Friday’s Nonfarm Payrolls report.

The GBP/USD collapses after the Bank of England’s decision to raise the Bank Rate by 50 bps to the 4% threshold. Economic data revealed in the United States (US) reassured the tightness of the labor market, meaning that the US Federal Reserve, albeit hiked rates 25 bps on Wednesday, still has ways to go. At the time of typing, the GBP/USD exchanges hands at 1.2280 after hitting a high of 1.2401.

The Bank of England raised rates, but the Pound failed to rally

Before Wall Street opened, the Old Lady of Threadneedle lifted rates to its highest peak since 2008, from 3.50% to 4%, in a split 7-2 vote, as two members voted for no change to the Bank Rate. Following the BoE’s decision, its Governor Andrew Bailey said that “we’ve seen the first signs that inflation has turned the corner,” but commented that it’s too soon to declare victory, adding that members of the Monetary Policy Committee (MPC) would need to be “absolutely sure” that inflation is cooling.

On its statement, the BoE removed the “respond forcefully, as necessary” phrase, opening the door for speculations that Bailey and Co. could pause if needed. The BoE updated its forecasts in the monetary policy report and expects inflation to edge toward 4% by the end of 2023. The BoE added that a recession might hit the UK, but it would be “shallower,” with Gross Domestic Product (GDP) foreseen at -0.5% in 2023, vs. November’s -1.5%, projected by the BoE.

Given the backdrop, the GBP/USD extended its losses toward its daily low of 1.2238 before recovering some territory and reclaiming the 20-day EMA  at 1.2289.

Aside from this, the US Department of Labor (DoL) revealed that Initial Jobless Claims for the last week ending on January 28 dropped to 183K, slightly below the last week’s 186K and lower than the 200K estimated by street analysts, showing the labor market resilience. Today’s data added to Wednesday’s JOLTs report that showed vacancies rising, while an ISM report on Wednesday stated that manufacturers “are not substantially” reducing their personnel.

Meanwhile, on Wednesday, the US Federal Reserve raised rates to the 4.50-4.75% range as widely expected, though it kept the door open for more hikes as needed. Fed’s Chair Jerome Powell added that more rates “will be appropriate,” emphasized the FOMC’s commitment to bring inflation down to the 2% target, and acknowledged that the “disinflation process has started,” which sent equities rallying sharply.

What to watch?

The economic docket will feature the S&P Global/CIPS Services and Composite PMIs and BoE’s Huw Pill speech on Friday. On the US front, employment data led by the Nonfarm Payrolls report, alongside the ISM Non-Manufacturing report, would update the US economy status.

GBP/USD Key Technical Levels