GBP/USD sliding after dovish BoE hike

The British pound has posted sharp losses on Thursday and continues to lose ground in the North American session. GBP/USD is trading at 1.2251, down 0.98%.

BoE raises rates, but less pessimistic

The major central banks remain the focus of the market’s attention. The Bank of England raised rates by 50 basis points, just one day after the Federal Reserve’s 25-bp hike. This marked a second straight increase of 50 bp, bringing the cash rate to 4%. As with the Fed decision, the hike was expected, but investors found plenty to cheer about, resulting in the pound reversing course and losing ground.

Governor Bailey said in a follow-up news conference that inflation pressures remained and inflation risks were skewed to the upside. Still, investors found plenty of reasons to be optimistic. Bailey said that inflation had turned a corner and noted that members had removed the word “forcefully” from its forward guidance statement. The BoE is now projecting that inflation will fall to around 4% by the end of the year and that the recession will be shallower than it had anticipated. The less pessimistic outlook for inflation and the economy sent risk appetite higher and pushed the pound lower. The markets were in a good mood after the decision, but there are plenty of problems ahead – inflation is above 10% and some half a million workers went on strike on Wednesday.

The Fed raised rates by 25 basis points as was widely expected. The Fed noted that inflation has eased but reminded listeners that it remained much higher than the 2% target. Jerome Powell signaled that more rate hikes are coming and said he did not expect to cut rates this year. This was essentially a repeat of the hawkish message we’ve heard before, but the markets chose to focus on Powell saying that the disinflation process had started and that he expected another couple of rate hikes before winding up the current rate-hike cycle. This sent the US dollar broadly lower on Wednesday.

Besides inflation, the Fed is focused on employment data, which will make Friday’s nonfarm employment report a key factor in future rate policy. In December, nonfarm payrolls fell from 256,000 to 223,000 and the downturn is expected to continue, with an estimate of 190,000 for January. This release could result in further volatility in the currency markets on Friday.

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GBP/USD Technical

• GBP/USD has broken below support at 1.2369 and 1.2289. Next, there is support at 1.2184
• There is resistance at 1.2474 and 1.2554