BoE Historic Hike & Bleak Outlook

The Bank of England delivered a historically large 0.5% rate hike last Thursday, but offered another gloomy outlook for the UK economy, as it expects even higher cost of living and a recession. It now projects CPI inflation to peak above 13% in Q4, as well as GDP contraction, with output to continue falling in every quarter until the end of 2023.

The BoE’s communication leaves much to be desired and the latest commentary was perplexing, in regards to the bank’s rate intentions ahead. Officials pointed to more tightening and repeated their pledge to “act forcefully” if needed. However, they now added that “policy is not on a pre-set path”creating an obscure policy outlook.

Adding to the ambiguity, Governor Bailey sounded more hawkish speaking to BBC afterwards, warning that the bank “will have to raise rates even higher” than it would otherwise do, if inflation becomes more embedded. On the other hand, policy maker Hugh Pill struck a softer note on Bloomberg a day later, as he cautioned against banking on another outsized move, saying “I don’t think you can read in to subsequent meetings the fact we made 50 basis points change. I would caution against that”.

Blockbuster US Jobs Report

A day after the BoE decision, we got the undoubtedly impressive employment report from the United States. The US economy added 528,000 new payrolls in July, the highest print in five months, whereas the Unemployment Rate dropped to 3.5% and pre-pandemic levels.

The US Federal Reserve has dismissed fears of a recession, despite the two consecutive quarters of contraction, citing mostly the strong labor market. Last month, chair Powell had noted that “It does not make sense that the economy would be in recession”given this and the many areas of the economy that are performing “too well”.

Friday’s blockbuster report, definitely adds credence to central bank’s narrative and provide the vital space to continue targeting inflation. This raised expectations for another outsized rate increase in Septemberwith CME’s FedWatch Tool pricing in a 0.75 move with more than 60% probability, at the time of writing.

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GBP / USD Analysis

The BoE bleak economic assessment along with the vague guidance and the impressive employment figures form the US, delivered and one-two-punch to the pair, which ended last week with losses, after two profitable ones.

It is not only the BoE any more that has vague communication, as other central banks have now offered messy forward guidance, while there is still more than one month until the next policy meeting from the BoE and the Fed.

Official probably don’t want to put themselves in the corner, as they expect important data points in the meantime, starting with this week’s US CPI and UK GDP that can determine the pair’s next leg.

GBP / USD is upbeat today and retains the ability to pierce into the daily Ichimoku Cloud again and try for fresh highs (1.2294), but it does not inspire confidence for taking out 1.2407.

On the other hand, the cloud had stopped the last ascending leg and the ensuing slide has made it vulnerable to 1.1933, although further weakness towards 1.1759 and beyond will require a catalyst.