The Fed raise rates again, Bank of England expected to confirm biggest rise in years
Federal Reserve
The US dollar surged in early European trade on Thursday after the Federal Reserve hiked rates by a further 75 basis points, while sterling retreated ahead of the Bank of England policy meeting.
GBP/USD has fallen nearly 3% since last night, declining from 1.1548 to currently trade at 1.1256.
The FOMC announced the rate hike on Wednesday evening after the their usual two day meeting. This hike was its fourth such increase in a row. This was widely expected, and it was the comments from Chair Jerome Powell indicating that the battle against inflation will require borrowing costs to rise further that propelled the greenback higher.
"Incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected," Powell said, adding: "It is very premature to be thinking about pausing, we have a ways to go."
These comments ended hopes that he would signal a pivot to a less aggressive stance in the coming months. That said, even if U.S. monetary policymakers slow or halt their current interest-rate hiking campaign, the dollar will have a monetary “tailwind” in the coming year, according to former Federal Reserve Chair Alan Greenspan.
Bank of England meeting
Another volatile day expected as markets prepare for the the Bank of England's interest rate decision at 12pm and this volatility is likely to continue in the following hours as investors digest the Bank's latest forecasts and guidance contained in the Monetary Policy Report.
It is widely believed that a 75 bps hike is fully priced in as the Bank fights to bring double-digit inflation back down to 2.0%.
The Bank of England’s 50 bps interest rate hike in October would have likely contributed to the market chaos caused by Liz Truss’ catastrophic mini-budget. It's unlikely the Bank of England will repeat the mistake, as rates are set to rise by at least the 0.75% the market is expecting.
The initial risk for the Pound is that the Bank underwhelms and goes with a 50bp move. Such a move could possibly see GBP retreat across the board and extend its recent losses vs the dollar and the euro. It is also worth nothing that the Monetary Policy Committee has tended to underwhelm against market expectations since it first hiked in late 2021.
Beyond the initial rate hike, the market will react to the release of crucial economic forecasts from the Bank's economists as well as broader guidance from Bank Governor Andrew Bailey. These are arguably more important for the Pound, as was proven by the enduring downside reaction to August's Monetary Policy Report which surprised on account of its pessimism regarding the economic outlook.
In August the Bank forecasted a five-quarter recession on account of the market's expectation for Bank Rate to rise to a peak of 3.0%. Markets now anticipate a peak of approximately 5.0%. This creates a risk that the Bank releases an even more dire set of economic forecasts that spooks the market and sends Sterling lower.
EUR/USD
After having surged toward parity with the initial reaction to the Federal Reserve's policy statement, EUR/USD made a sharp U-turn and closed in negative territory on Wednesday having sustained heavy losses. The pair has failed to stage a meaningful rebound and extended its slide early Thursday, with the pair currently trading down 0.65%.
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