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The Bank of England is one of the first to start raising interest rates after the coronavirus pandemic. It also intends to maintain an aggressive approach to monetary policy.
As such, it is likely that the central bank will announce a quarter-point rate hike after its meeting today, pushing it to 0.75%. That will be a response to the persistently growing inflation in the UK.
Energy prices shot up recently because of the conflict in Ukraine. It contributed to a wider increase in prices in the global economy, making economists confident that Bank of England members will push for a 50 bp increase at once, which, if happens, will prompt a rapid increase in GBP/USD.
In short, the actions of the Bank of England will be forced as no one wants to raise rates in the face of slowing economic growth. But if the central bank does not do it, the UK may face another recession because inflation already reached a three-decade high and is projected to increase further this year due to sharp jump in food and energy prices. Economists expect it to reach 10% this October, much higher than the Bank of England's 2% target. Too high inflation will lead to a crisis in living standards, which will hit the country's population very seriously. The most serious problems will be in utility and fuel.
Markets expect rates to increase to 2% by the end of this year, including an unprecedented 50 basis point hike in June. They will also assess today's minutes for any signs of a change to a more aggressive direction in BoE policy. One of these signs may be comments about the consequences of the geopolitical situation for the global economy. Markets will also keep an eye on how the central bank will deal with its shrinking balance sheet.
An aggressive policy change will have a positive effect on GBP/USD. Buyers already showed themselves after the pair's recent drop and are now focused at 1.3190. Its breakdown could lead to a jump to 1.3240 and 1.3275, while a dip below 1.3120 will result in a fall to 1.3080, 1.3030 and 1.2970.
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