Cable has fallen by 1.3% on the day to a low of 1.2455 as the pound sees a tumble after the BOE proceeded with a more “dovish hike” one would say here.
At first glance, the policy votes and subtle change to the rate guidance may appear to present some hawkish undertones but the central bank’s view on the economy over the next year or so is rather bleak.
The 10% inflation forecast for this year adds to the worsening cost-of-living crisis now as policymakers expect Q4 GDP to contract and a recession to follow in early 2023. That’s not exactly comforting but still they are forecasting that rate hikes will continue towards 2.50% by the middle of next year.
As much as inflation is an issue they need to tackle, one has to wonder whether a struggling economy is something that policymakers can ignore later in the year when sticking with tighter policy. I reckon the doubts being sowed there are in part weighing on the pound at the moment.
The pound has pretty much erased its post-FOMC jump against the dollar as sellers will now look towards a firm weekly break below the 1.2500 level to solidify the downside momentum. With the Fed having no problems putting out a more hawkish narrative, the divergence could bite at cable further.
Below 1.2500, there isn’t much support for the pair left through to 1.2000.