Yesterday, the Bank of England raised interest rates by 25 basis points. This decision was too expected and predictable, so this rate hike did not impress GBP/USD traders. Market participants also effectively ignored the fact that the four members of the Monetary Policy Committee were proposing a more hawkish option, which involved a 50 basis point rate hike. However, the majority of votes was minimal – five members of the Committee still insisted on a 25-point increase. The GBP/USD pair reflexively surged by 30-40 points, after which it stood still while waiting for the comments of the BoE Governor, Andrew Bailey.
It is noteworthy that both the tone of the accompanying statement and the rhetoric of the head of the Bank of England were hawkish. In particular, the final communique contains a forecast that the UK inflation will only grow in the next few months: it is expected to approach the 6% mark in February and March, after which it will reach its peak in April – 7.25% target. It can be recalled here that according to the Bank of England's November forecasts, the peak value of inflation should have been 2% points lower. But for now, the Committee acknowledges that price pressures will continue in the near future – among other things, the Central Bank has tripled its forecast for wage growth this year to 4.75%. The accompanying statement also indicated that the British Central Bank will begin to reduce its portfolio of securities, which has grown to 895 billion pounds over the past ten years. In addition, the regulator said it would stop reinvesting bond payments as part of its quantitative easing policy.
All this suggests that the Bank of England has already resolved some issues, but has not decided on a 50-point rate increase (although 4 votes in favor of this decision say a lot). Commenting on the current situation, Andrew Bailey said that the British are waiting for a decline in real incomes (rising energy and import prices will cause an increase in inflation and affect incomes) this year, so if the Central Bank does not raise the interest rate, "the situation will worsen." In this context, he added that the regulator needs to focus on the inflation target.
In other words, the head of the Central bank made it clear that the BoE will continue to tighten the parameters of monetary policy. He did not talk about the pace of the rate increase, but based on the general expectations of the market, the Central Bank will return to this issue at least twice, namely in spring and summer. Moreover, some experts believe that if inflation growth in February and March turns out to be stronger than the forecasts of the Central Bank, the regulator may still decide on a 50-point increase at one of the spring meetings.
It should be noted that the market calmly reacted to the rather hawkish results of the February meeting. The GBP/USD pair has risen only 50 pips from yesterday's opening price despite the rate increase, the four votes in favor of a 50-point increase, and the announcement of a further rate increase. For comparison, it is worth noting that the EUR/USD pair surged almost 200 points on Thursday, reacting to the results of the ECB meeting. It can be agreed here that a certain intrigue remained, which was eventually resolved in favor of the euro. Nevertheless, we believe that the Bank of England has also become more hawkish, on the verge of a 50-point rate hike.
At the moment, GBP/USD buyers are trying to consolidate in the area of 1.36. The upward impulse faded yesterday, but the pair is still rising by inertia. Apparently, the pound will move in the wake of the US dollar today and in the medium term, which will set the tone for trading. In this context, special attention should be paid to Nonfarm data, which will be published at the start of the US trading session.
According to preliminary forecasts, the US unemployment rate in January should decline to 3.8%, and the number of people employed in the Nonfarm sector should increase by only 166,000. At the same time, wages should also please the dollar bulls again: the average hourly wage should rise to 5.2% in annual terms. In this case, the indicator will update an almost annual record – the last time it was at this level was in February 2021. If the above components come out at least at the level of forecasts, the US dollar will receive some support. Traders will most likely focus on reducing unemployment and increasing wages.
However, it can be recalled that traders were unpleasantly surprised by the ADP report on Wednesday, which came out in the negative area for the first time in a long time (since December 2020). The indicator came out at -301 thousand, which is the biggest drop since April 2020. According to ADP representatives, the sharp decline is due to temporary factors, among which is the wave of the Omicron strain in the US. The ADP report does not always correlate with Nonfarms, but this is a "wake-up call". If the official figures on the growth of the US labor market also disappoint traders, the US dollar will come under significant pressure, and the GBP/USD pair will be able to consolidate in the area of the 36th figure and test the resistance level of 1.3650 (upper line of the Bollinger Bands on the four-hour chart). But if today's release comes out in the "green zone", the US currency will be in favor again, especially amid the negative previous ADP report.
Given such uncertainty, it is advisable to open trade deals after the publication of key data on the US labor market. The support level (downward target) is 1.3550 (middle line of the Bollinger Bands indicator on the H4 and D1 timeframes). The nearest resistance level is 1.3650 (upper line of Bollinger Bands on the four-hour chart).
