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Summary: The Bank of England (BoE) raised its interest rates by 0.25 percentage points to 5.25% today, reaching the highest level in 15 years. This is the 14th consecutive rate hike by the central bank to tame stubborn inflation pressures. Previously, some economists were concerned that the BoE might opt for a 0.5 percentage point increase, which could increase the risk of an economic downturn. However, after the UK's annual inflation rate decreased last month, policymakers chose a more moderate rate hike.

Fundamentals

As expected, the Bank of England raised interest rates by 25 basis points to 5.25% today. The decision was passed with a 6-3 vote in favor of the rate hike, marking the first time this year that there has been a three-way split on this decision. Two Monetary Policy Committee members, Mann and Haskell, voted in favor of a 50 basis point rate increase this month, while member Dhingra continued to vote for keeping rates unchanged, warning of risks of over-tightening. BoE Governor Andrew Bailey emphasized that inflation hits the poorest people the most, and the central bank needs to ensure it falls back to the 2% target.

Earlier, both the Federal Reserve and the European Central Bank raised rates by 25 basis points, but unlike them, the BoE has given almost no indication of signaling an end to rate hikes in its fight against high inflation. In its latest guidance on interest rate prospects, the Monetary Policy Committee stated that it would ensure rates have enough restrictions for a sufficiently long period to bring inflation back to the 2% target. They also added that some risks of sustained intensifying inflation pressures may have already emerged.

The BoE's statement included the wording that the current monetary policy stance was "restrictive," suggesting its willingness to maintain rates at higher levels for an extended period to sustainably achieve the 2% inflation target. This acknowledges a long-term stance of keeping rates high as the core CPI in June remains elevated at 6.9%.

While there are evident signs of core price pressures cooling down, there is still a way to go to reach the target. The BoE's wording indicates that it expects prices to keep rising, though not overly concerned about how high they will go. Hence, the focus now shifts from overall inflation (and any signs of sharp inflation decline) to service inflation stickiness and how quickly private-sector wage growth of 7.7% will descend to the BoE's year-end target of 6%.

The interest rates in the UK may be reaching their peak but are unlikely to come down quickly. The hawkish tone of the BoE, expressing the need for "restrictive" rates if necessary, indicates that further rate hikes are on the horizon and could be maintained at this elevated level for about a year. The central bank seems to recognize that core inflation needs time to cool down. We expect rates to remain unchanged until the end of 2024.

Technical Analysis

The recent weakness in the British pound reflects a decline driven by heightened global risk aversion. On Thursday, the GBPUSD pair has cumulatively dropped 462 pips since its high point on July 14th at 1.3142, reaching a key mid-term support level at 1.2630.

Yesterday's intraday low at 1.2680 nearly reached the critical mid-term support at 1.2630, which is converging with the lower boundary of the mid-term upward channel since the low at 1.1147 on November 4, 2022, and the upward-sloping 100-day SMA. However, the price tested that level today. Currently, a consolidation zone is forming above this level as short-term downward momentum has reached oversold conditions. A breakout to the upside may lead to a rise toward the 1.2825 level.

On the other hand, a sustained break below 1.2630 and holding below this level would invalidate the scenario of a rebound, exposing the next support level at 1.2445.

Overall, the 1.2630 level seems to be the endpoint for this round of bearish movement, and failure of the bulls to regroup at this level could lead to more significant losses. However, we should not rule out the potential for a rebound as the currency pair is already in an oversold condition. In terms of trading strategy, buying the dips is recommended.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.2630

Target Price: 1.2918

Stop Loss: 1.2548

Valid Until: 2023-08-17 23:55:00

Support: 1.2610, 1.2592, 1.2552

Resistance: 1.2759, 1.2842, 1.2896