The British pound collapsed against the US dollar after the publication of the Bank of England's decision on interest rates. Although the regulator has decided to raise rates, the situation in the economy and inflation risks outweigh all the advantages of policy changes. It is obvious that the Bank of England did not make these changes out of a good life, but to combat inflation, which it predicts to be around 8.0% or even yours by the end of this year - an economic shock in such conditions for a country that is used to seeing inflation around 2.0% per annum, obviously cannot be avoided.
As noted above, the Bank of England today raised interest rates for the third time in a row, but adopted a more dovish tone, as it is expected that the Russian-Ukrainian conflict will continue to support inflation at a high level. The Bank's Monetary Policy Committee voted 8-1 in favor of further raising the main interest rate by 0.25 percentage points, bringing it to 0.75%. Inflation in the UK has already reached a 30-year high even before the start of the conflict between Russia and Ukraine, which led to a sharp increase in energy prices. Current energy prices are expected to put even more upward pressure on the central bank's inflation forecasts in the future.
Let me remind you that during the February meeting, the monetary policy committee introduced a consistent increase in interest rates since 2004 and raised its inflation forecast to a peak of 7.25%, which is expected in April not only due to strong energy growth but also due to a record recovery in the labor market. The regulator also stated that any further tightening of monetary policy will depend on the medium-term prospects for inflation, which have worsened due to a sharp increase in geopolitical tensions, which led to a jump in energy prices. "Global inflationary pressures will increase significantly in the coming months, while growth in countries that are net importers of energy, including the UK, is likely to slow down," the Bank said in a report published on Thursday.
Currently, the bank expects further inflation growth in the coming months to about 8% in the second quarter and possibly even higher at the end of the year. Given the tension in the labor market and the constant pressure of domestic prices, the committee also noted that some further moderate tightening of monetary policy may be appropriate in the coming months, although the risks are two-sided depending on the development of the situation in the economy. Thus, the Bank of England is trying to sit on two chairs: not to harm economic growth, which is slowing down very quickly, and also to do everything possible to combat inflationary pressure, which can cause a more crushing blow to the economy if it gets out of control.
Against this background, the British pound collapsed against the US dollar, dropping from an intraday high of 1.3202 to 1.3080 - completely losing the advantage gained after yesterday's growth against the backdrop of the Federal Reserve meeting.
Yesterday, the Federal Reserve also raised interest rates by a quarter of a percentage point and announced plans to hold six more such increases this year. Thus, the Fed launched a campaign to combat the highest inflation in four decades. It has already been saying a lot that such actions create quite serious risks for future economic growth, but for the central bank, inflation is the number 1 problem right now.
As for the technical picture of the EURUSD pair
Euro bulls, though, aimed at 1.1060, but every time they approach this level, activity decreases. It seems that the geopolitical tensions around Russia and Ukraine have eased a little, but today's statements by Kremlin representatives prevented this. Dmitry Peskov denied reports that the warring parties are approaching a settlement of the conflict, accusing Kyiv of slowing down negotiations. Euro buyers need to consolidate above 1.1060, which will allow the correction to continue to the highs: 1.1120 and 1.1165. The decline of the trading instrument will be met with active purchases in the area of 1.1020. However, the key support level remains the 1.0960 area.
As for the technical picture of the GBPUSD pair
The British pound has already fallen into the support area of 1.3080 and is not going to adjust up yet. The dovish rhetoric of the Bank of England puts the British pound in a difficult position against the US dollar again. Now the bulls need to think about how to bring the 1.3140 level back under control. Only this will allow us to count on a more powerful correction of the pair in the area of 1.2190 and 1.3240. If we go below 1.3080, then the pressure on the trading instrument will increase: in this case, we can expect a fall to 1.3030 and the output of the trading instrument to a new annual minimum of 1.2960.
