GBP/USD fades Thursday’s rally and drops below 1.2200 post-FED/BoE rate hikes

• The GBP/USD will finish the week with losses close to 1%.
• Central bank divergence between the Fed and BoE will favor the greenback.
• Fed’s Kashkari supported 75 bps in June and July, followed by 50 bps increases.

The British pound extends its losses in the week, set to finish with losses near to 1%, after Thursday’s afternoon rally post the Bank of England (BoE) 25 bps rate hike, with the GBP/USD reaching weekly highs around 1.2400. However, the greenback regained some strength, and USD bulls faded the GBP/USD rally and sold the major at a better level. At the time of writing, the GBP/USD is trading at 1.2181, down 1.36% in the New York session.

Sentiment has improved as global equities rallied, except for the Dow Jones and the S&P 500. In the FX space, the market mood is mixed. The greenback remains in the driver’s seat, with the US Dollar Index recovering Thursday’s losses, up by 1.11% at 104.967.

Fed and BoE divergence might favor the US dollar

On Friday, investors begin to assess central bank divergence between the UK and the US. Initially, it favored the Bank of England (BoE), which was expected to hike rates by 50 bps at the beginning of the week. However, with UK’s economy starting to slow down and the BoE expects a recession by 2023 – the “old lady” backpedaled and raised rates by a nimble 25 bps. It’s also worth noting that the BoE removed forward guidance from the monetary policy statement, shifting the sentence to “the scale, pace and timing of any further increases in Bank Rate would reflect the Committee’s assessment of the economic outlook and inflationary pressures.”

Aside from this, the US Federal Reserve took the bull by its horns and raised rates by 75 bps, the biggest increase since 1994. Although it was a bold move by the Fed, its Chairman Jerome Powell said at his presser that moves of that size would not be “common,” which sounded dovish but opened the door for the July’s meeting for a move of that size or 50 bps.

Meanwhile, once the central bank blackout period finished, BoEs and Fed speakers started to cross wires.

The BoE Chief Economist Pill said that markets will have to make their own judgment as to whether the BoE is considering a 50 bps hike while stressing the conditionality around the inclusion of “forcefully” in the statement in the context of “if necessary.”

In the meantime, Minneapolis Fed Neil Kashkari said that he supported 75 bps in June and could support another in July. He added that a prudent strategy might be to continue with 50 bps increases. Earlier, St. Louis Fed President James Bullard said that a soft landing is feasible if the post-pandemic shift is done well.

Data-wise, the US economic docket reported Industrial Production for May, expanding by 0.2% MoM. Although the reading missed expectations for an increase of 0.4%, it shifted sentiment sour.

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