EURUSD Forex

How the BoE Rate Hike Affects the GBP/USD and EUR/GBP Pairs

How the BoE Rate Hike Affects the GBPUSD and EURGBP Pairs

The Bank of England (BoE) raised its key interest rate by 25 basis points to 4.5% on Thursday, the highest level since 2008, as it tries to rein in soaring inflation in the UK. The rate hike was widely expected by the markets, but what does it mean for the GBP/USD and EUR/GBP currency pairs?

GBP/USD: Bullish Outlook Despite Dollar Rebound

The GBP/USD pair retreated from its recent highs last week, as the US dollar rebounded from its multi-month lows amid rising expectations of a Fed tapering announcement in June. However, the pair still remains in an uptrend, supported by the hawkish stance of the BoE and the strong recovery of the UK economy.

The BoE was the first major central bank to start raising interest rates in December 2021, and has delivered 12 consecutive hikes since then. The latest move took the benchmark rate to 4.5%, which is significantly higher than the Fed’s target range of 0-0.25%. This creates a positive interest rate differential for the GBP/USD pair, which attracts investors looking for higher returns.

Moreover, the BoE signaled that it expects inflation to remain above its 2% target for some time, and that further tightening may be required if persistent price pressures emerge. This suggests that the BoE is not done with hiking rates yet, and that it may reach a peak of 5% by August, according to Goldman Sachs.

On the other hand, the Fed is widely expected to announce a reduction of its monthly bond purchases in June, but it has stressed that tapering is not tightening, and that it will keep interest rates near zero until 2024. This implies that the Fed is more cautious about raising rates than the BoE, and that it may lag behind in normalizing its monetary policy.

Therefore, the GBP/USD pair may benefit from a widening interest rate spread between the UK and the US, which reflects the diverging outlooks of their respective central banks. The pair may also find support from the robust growth of the UK economy, which is expected to expand by 7.3% this year, according to the IMF.

EUR/GBP: Bearish Trend Continues as Euro Underperforms

The EUR/GBP pair broke below its 200-day moving average last week, signaling a bearish trend continuation. The pair has been under pressure since December 2021, when the European Central Bank (ECB) surprised the markets with a hawkish policy shift, raising its deposit rate by 10 basis points and announcing a gradual reduction of its pandemic emergency purchase programme (PEPP).

However, the ECB’s move failed to boost the euro, as it was overshadowed by the faster and more aggressive rate hikes by the BoE. The EUR/GBP pair also suffered from the underperformance of the eurozone economy, which has been hit harder by the Covid-19 pandemic and its variants than the UK.

The eurozone GDP grew by only 0.1% in the first quarter of 2023, compared to 1.3% in the UK. The eurozone inflation also eased to 2.9% in April, below the ECB’s target of close to but below 2%, while the UK inflation remained above 10%. These data suggest that the ECB may have less room to tighten its policy further than the BoE, and that it may face more downside risks to its growth and inflation outlook.

Therefore, the EUR/GBP pair may continue to slide lower in the coming weeks, as it retraces its sharp rally on December 15, when it gained 1.6% in one day following the ECB’s hawkish announcement. The pair may also face resistance from its 200-day moving average, which now acts as a dynamic barrier.

 

Author
Mark Klocke is a renowned author and financial analyst, specializing in forex trading. He is a regular contributor to Livemarkets.com, where he provides insightful analysis and commentary on various forex pairs. With years of experience in the financial industry, Mark has developed a keen eye for identifying market trends and predicting their impact on currency movements. His analysis is widely respected in the forex community and has helped traders make informed decisions about their investments. Mark is also a sought-after speaker at financial conferences and events, where he shares his expertise and insights with industry professionals.