GBPUSD sustained above $1.2128 during the Asian session today. Market awaits the Bank of England (BoE) Interest Rate Decision tonight. The market expects the BOE committee to increase the current interest rate from 1.25% to 1.75% as experts forecast a 50-basis points hike.
The British pound witnessed significant devaluation against the US dollar and lost more than 12% of its value against the US dollar in the last two months. A critical factor, failure of the BoE to match the series of aggressive interest rate hikes by at least 75 basis points embarked by the Fed for two consecutive times now devalued the British pound.
Generally, investors tend to blame the BoE for being relatively dovish towards its interest rate hike. For instance, the last interest rate hike embarked on by the committee was in June by only 25 basis points. This is highly contrasted with the aggressive attitude exhibited by the Fed by consistently hiking its rate by 75 basis points.
However, with the UK inflation rate rising to four decades high in June, the committee will be forced to take drastic measures this time. Therefore the market expects at least 50 basis points hiking from the committee or even higher during their session today. Investors expect the committee to rise to the expectations of reviving the pound again and act more aggressively this time by raising its interest rate by at least 50 basis points. The last time the committee embarked on a halved basis point hike was in February 1995.
As noted by the Office for National Statistics, British Inflation, measured by the consumer price index, has risen to a record high in June, currently at 9.1% – a level unseen so far since February 1982. This has marked the country with the highest inflation rate among other wealthy nations making up the G7.
The BoE will be expected to embark on its most effective interest rate in 27 years, and further unveil its strategy for unwinding its stimulus package worth over £895 billion delivered in the past. Otherwise, the inflation rate might go up above 11% this year. The committee signalled earlier during its meeting in June that it would act more aggressively if it saw further signs of persistent inflationary pressure.
What is the forecast for GBPUSD?
The British pound is currently on short-term recovery after a prolonged fall against the US dollar. An aggressive interest rate hike by at least 50 basis points stands out as the only remedy to initiate the path for long-term recovery for the British pounds against the US dollar. In this case, we expect GBPUSD to rise rapidly this week and continue to be bullish throughout the month. The primary target is $1.2488.
An interest rate hike for the British pounds by 50 basis points will be considered slightly dovish. This is because of the high rate of inflation bedevilling the British economy at the moment. The market appears to have priced into this already. This will only trigger a short bullish trend for GBPUSD with the target of $1.2289 before a reversal sets in again.
Repeating the 25 basis points hiking witnessed in June will be a full-time bearish market for GBPUSD. This will be considered a dovish attitude from the monetary policy committee and will probably weaken pounds. Given the reality, it is less likely that the committee will take such a risk again.
The dominant forecast for GBPUSD is bullish but dependent on the rate at which the BoE hikes its interest rate today.
NFP report
The NFP report gives the US unemployment rate of the past month, affecting the US dollar directly while affecting other pairs matched with the US dollar indirectly.
The higher reading in the US unemployment rate will weaken the US dollar and strengthen the British pound. Conversely, a lower reading in the unemployment rate through a jump in job creation will strengthen the US dollar against any other pair matched with it. GBPUSD will also be expected to react to this data’s outcome. In this case, this pair will exhibit significant volatility for the rest of the week.
