Over the last week we have seen Pound Sterling exchange rates rally from 1.19 to a close above 1.20- this is mostly traders pricing in the fact that the Bank of England are expected to raise interest rates again this week.
Now, once common mistake people make is waiting for these decisions thinking that the rate rise will make the Pound continue, unfortunately, this is not always the case. The fact that we all know that the Central Bank is expected to make this move means that the current strength we are seeing in Sterling is because of that- so we will only see further movement on GBP once we have heard the next piece of forward guidance from the BoE. The other risk is that if the BoE does NOT raise rates- then GBP could lose at least 2% in minutes, similar to what we saw in November.
To understand what may be said in this week’s meeting is important to understand where the economy is right now- globally. Risk assets have been selling off over the last 2 weeks due to the Fed’s hawkish stance on raising rates and cutting QE- this is now causing a ripple effect into the market and currency pairs such as GBPUSD have been hit hard, now trading at 1.33 after being as high as 1.38 just earlier this month.
With the Fed now looking to raise rates as early as March, we do expect to see momentum shift across the board and become slightly more risk off as things develop, for the Pound to continue in its strength, the BoE has to raise rates by 25bps, and continue their hawkish stance on markets by stating more rate hikes will be needed in 2022- this will support Sterling- if we do not see this, then unfortunately I think GBP gains could be capped for the time being- so the press conference will be even more important than the rate decision itself this week.
Aside from the rate decision, as it is the first week of a new month, we also have NFP’s this Friday, which could be very interesting given the fact that the U.S has been dealing with the Omicron variant as well, and with the Fed’s hawkish stance, they need the jobs market to back up the current optimism in markets- estimates for this release are all over the place- as high as 250k jobs added and as low as 400k jobs lost- so if you are trading with the USD on Friday, I would remain cautious going into this particular release.
