GBP/USD dives following unexpected BoE rate hike, sparking UK's recession concerns

• GBP/USD loses 0.26% as BoE's unexpected 50 bps rate hike raises recession fears.
• UK inflation data trigger aggressive BoE action, prompting a curve inversion in GILTs.
• Powell reiterates the near-term rate hike plan, pushing GBP/USD lower.

GBP/USD extended its losses after hitting a daily high of 1.2841 after the Bank of England (BoE) surprised the markets by hiking rates 50 bps but failed to underpin the Pound Sterling (GBP). Late in the New York session, the GBP/USD is trading at 1.2735, down 0.26%.

Sterling slides as investors fret over UK economic outlook

On Thursday, the BoE's decision to lift rates to the 5% threshold caught off guard market participants, which foresaw a quarter of a percent increase to the Bank Rate. But Wednesday, inflation data in the United Kingdom (UK) spurred an aggressive reaction by Andrew Bailey and Co, a sign seen by investors that the central bank is behind the curve.

The BoE's decision deepened an inversion of the 2 to 10-year curve in GILTs, a sign that investors expect a recession in the British economy.

On Wednesday, UK's inflation data revealed Office for National Statistics (ONS) saw the Consumer Price Index (CPI) at 8.7% YoY in May vs. projections for an 8.4% drop, while core CPI stood at its highest level since 1992 at 7.1%.

The GBP/USD lost traction after the BoE's decision due to renewed fears that higher interest rates in the UK could trigger a recession. GBP/USD skyrocketed toward its daily high before stabilizing at around 1.2770. After that, GBP/USD returned most of its gains, reaching a low of 1.2725, before settling around current exchange rates.

Across the pond, the US economic agenda featured the second-day testimony of the Federal Reserve Chair Jerome Powell. Powell reiterated his posture, agreeing with the dot plots, as he said: "We (Fed) think we are within a couple of rate hikes of the level we need to be." He emphatically commented no rate cuts are expected and will have to wait until the Fed is confident that inflation is slowing towards its 2% target.

Data-wise, the US Bureau of Labor Statistics (BLS) revealed that Initial Jobless Claims reached their highest level since October 2021, growing by 264K exceeding estimates of 260K. At the same time, the US Commerce Department released the US Current Account widened to $219.3 billion in Q1, from a revised $216.2 billion in Q4 2022, exceeding estimates of $217.5 billion.

Existing Home Sales in May grew at a 0.2% MoM pace, above estimates of a -0.5% plunge, more than the upward revised April-s -3.2%  contraction.

Upcoming events

The UK economic docket will feature Retail Sales for May and S&P Global PMIs. On the US front, the agenda will reveal S&P Global PMI data and Federal Reserve officials crossing the newswires.

GBP/USD Technical Levels