Will the BoE hike by 0.75% as well?

GBPUSD falls to a new 37-year low towards 1.12 after the Fed hiked rates and as attention turns to the BoE rate decision. Will the BoE hike by 50 or 75 basis points?

·         The Fed hiked rates by 75 basis points and reaffirmed its commitment to fighting inflation

·         BoJ leaves interest rates unchanged, USD/JPY rises to 145.00

·         DAX is set for a 1.5% fall on the open after the Fed decision and after Putin escalates the war

The Federal Reserve, as expected, hiked rates by 75 basis points for a third straight meeting, taking the Fed funds rate to 3%-3.25%. The Fed lifted its projections for the rate to 4.4% at the end of this year and 4.6% next year.

Federal Reserve Chair Jerome Powell was unwavering in his hawkish message, which has remained unchanged since Jackson Hole. The Fed will keep hiking rates aggressively until the job is done and inflation returns to the central bank’s 2% target. Once again, Jerome Powell warned that higher rates would bring pain to Americans, but that was preferential to spiralling, embedded inflation.

The hawkish message was loud and clear, with the market now expecting another 75 basis point hike in November. The US dollar jumped to a 20-year high, and stocks tumbled 1.8% on the prospect of slower growth.

BoJ

Overnight the BoJ left interest rates unchanged at -0.1% and stuck to its dovish stance. Despite ‘rate checking’ earlier in the month, no FX interventions were made, and USD/JPY refreshed the 24-year high of 145.00.

BoE

Today it’s the BoE’s turn. After the Fed doubled down on its hawkish narrative, GBP/USD dropped to a fresh 37-year low of 1.12. A weak pound only adds to the inflationary pressures the BoE is attempting to fight.

The Fed’s decision may help sway BoE policy makers towards a larger rate hike, but that is by no means guaranteed. Heading into the MPC meeting, policymakers were weighing up a 50 and a 75 basis point hike. A 50 basis point hike appears particularly small given how high inflation is and how long it has remained elevated. Alongside a 100 bps hike from the Riksbank and 75 bps hike from other central banks such as the ECB, BoC, and RBA, a 50 bps hike would make the BoE look relatively relaxed about the current inflation picture or completely behind the curve, instead hoping that a recession in the UK will tame inflation.

In light of the Fed’s move, the BoE needs to hike by at least 75 to keep inflation in check and prevent any further negative impact from a falling pound. Additionally, the central bank could feel emboldened following the fiscal support measures announced by Liz Truss so far and those expected to be announced tomorrow.

Market expectations are tilted towards a 75 bps hike. If the BoE votes in favour of a smaller 50 bps hike, the market will likely be disappointed, and GBP/USD could fall towards 1.10.

Russia

Following the selloff on Wall Street, European stocks are set to open lower. The DAX is set to underperform its peers, pointing o a 1.4% loss on the open. News yesterday that Putin ordered the mobilisation of troops to support the ongoing war in Ukraine, combined with a thinly veiled threat of a nuclear response, also weighs on sentiment.

EUR/USD falls towards 0.98, a new 20-year low.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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