Today, the Bank of England may once again raise the interest rates to curb soaring inflation. How will this decision impact the GBP/USD pair? Will the pound sterling climb higher?
On May 5, the Bank of England's 'Super Thursday' meeting will take place. Analysts believe that there is a high chance that the regulator may announce another rate hike.
If this scenario comes true, it will be the fourth rate increase since December last year. It will also be the fastest pace of monetary policy tightening for a quarter of a century.
Currently, the interest rate in the UK is 0.75%. The regulator intends to hike it by 25 bps, taking it to 1.0%, the highest level since 2009.
According to forecasts, policymakers may decide to raise the key rate to 1.0% almost unanimously.
Analysts expect an 8-1 vote by the BoE's nine rate-setters for an increase in the key rate to 1.0%, with one dissenter, probably Deputy Governor Jon Cunliffe. He could speak in favor of leaving rates at 0.75%.
Last month, BoE governor Andrew Bailey said that he and his colleagues were walking a "very tight line" to steer the world's fifth-biggest economy amid the global post-pandemic inflation surge aggravated by the Russia-Ukraine conflict.
In March, inflation in the UK came in at an annual 7%, the highest in 30 years. The figure exceeded the target level by more than 3 times.
Against the background of geopolitical tensions, consumer prices continue to rise rapidly. It forces the Bank of England to act more aggressively although there is an increased risk of recession.
There are already signs of a slowdown in the British economy. Consumer confidence is approaching a record low. Retail sales have been falling for 2 months in a row.
The pound sterling is unable to rebound because of concerns about the gloomy prospects for the UK economy. The British currency was trading against the US dollar at a 21-month low.
However, yesterday, it jumped sharply, logging the largest intraday increase since April 2021. The pound/dollar pair climbed by more than 1% to 1.2605.
Its growth was facilitated not by expectations of a rate hike but by Jerome Powell's dovish comments. On Wednesday, the US central bank raised the key rateby 50 bps to 0.75–1.0%. This was the biggest increase since 2000.
However, at a press conference, Fed Chairman Jerome Powell said that the regulator was not actively considering the possibility of rate hikes by 75 bps.
Such dovish comments were quite bearish for the US dollar. On Thursday, the US dollar index fell by 0.9% from a 5-year high to 102.450.
So, the GBP/USD pair has a chance to regain ground. If the Bank of England signals further gradual monetary policy tightening during the year, it may stir up the pound sterling.
Now, investors believe that the BoE will hike the interest rate to about 1.5% by the beginning of 2023. The key rate will remain at this level throughout the next year.
Another factor that could significantly influence the GBP/USD pair is the beginning of the QE tapering by the Bank of England.
At its meeting, the watchdog may also announce the balance sheet reduction that started during the global financial crisis more than 10 years ago.
This measure may help the Bank of England cope with inflation, which may reach 10% in April.
Thus, any hint about a more hawkish stance could push the GBP/USD pair to a high of 1.3000.