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BoE Set for A 50bps Rate Hike to Tame Inflation

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  • Markets expect the BoE to raise rates by 50 basis points.
  • The pound fell after the Fed delivered a 75bps rate hike and flagged more.
  • Britain’s short-term inflation outlook has improved.

Today’s GBP/USD outlook is slightly bullish as the Bank of England is expected to raise interest rates by at least half a percentage point to combat inflation that is barely off a 40-year high. While financial markets have priced in a larger hike to 2.5%, economists surveyed by Reuters last week expect the BoE to raise rates to 2.25% from 1.75%.

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On Wednesday, the US Federal Reserve raised its benchmark interest rate by 0.75 percentage points and hinted at other significant hikes. Following the Fed decision, the pound fell to its lowest level versus the dollar since 1985 and its lowest level against a basket of currencies since 2020, driving up the cost of imports.

Britain’s annual rate of consumer price inflation dipped from a 40-year high of 10.1% in July to 9.9% in August, marking the first decline in almost a year, though it was still far higher than the BoE’s aim of 2% and the highest in the Group of Seven. Since the BoE’s most recent meeting in early August, the short-term inflation outlook has improved slightly.

It is unlikely that Inflation will soar as high as the 13.3% peak the BoE had factored in for October, or rates of more than 15%, which economists predicted for early 2023. This is thanks to Liz Truss’s household and corporate energy pricing curbs.

GBP/USD key events today

All focus will be on the BoE’s interest rate decision later today, which will cause a lot of volatility. Investors will also pay attention to the initial jobless claims report from the US.

GBP/USD technical outlook: Big downside potential with bears eyeing 1.1200

GBP/USD outlook

The 4-hour chart shows the price below the 30-SMA and RSI below 50, showing a downtrend is in progress. The price broke below support at 1.1360, showing how strong the sellers were. This support has now turned to resistance, and the price might retest it at some point.

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The RSI got to the oversold region when buyers came in for a pullback. However, the downtrend looks set to continue with the next target at the 1.1200 psychological level.

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