The British currency once again stumbled after the Bank of England's decision on the key rate. However, analysts suppose that thepound sterling may halt its decline, resuming an upward movement.
On May 5, the Bank of England raised the interest rate to 1%, to the highest level since 2009. The regulator is trying to curb inflation, which currently exceeds 10%. Against this background, the pressure on the pound sterling increased. It sank significantly. UK government bonds also incurred losses.
Following the meeting, the Bank of England stressed the need for further monetary policy tightening in the coming months. At thesame time, the regulator warned about a high risk of a recession because of rate increases.
The regulator raised the rate for the fourth time since December 2021. According to experts, this is the fastest pace of monetary policy tightening in the last 25 years. The BoE does not rule out more rate increases despite concerns about a sharp economic downturn. "The point being is we are walking this very narrow path now. The proximate reason for raising [the] bank rate at this point is not only the current profile of inflation and what is to come and of course what that could mean for inflation expectations to come - but the risks as well," BoE governor Andrew Bailey said.
The pound sterling tumbled because of the hawkish tone of Bailey's speech. On May 5, it fell below the physiologically important level of 1.2400 for the first time since June 2020. The GBP/USD pair lost 2%, reaching 1.2380 after the announcement of the Bank of England's key rate decision.
The pair is expected to slip to 1.2000, a psychologically important resistance level. The support level, as well as the Fibonacci correction level of 161.8%, are located in this range. On May 6, the GBP/USD pair was trading at 1.2362, desperately trying to hold at its highs.
The Bank of England raised the interest rate from 0.75% to 1% per annum, the highest level in the last 13 years. The watchdog also revised its inflation outlook for 2022. Now, it expected inflation to amount to 10.25%, the highest since 1982. Inflation may soar to new highs, Bailey stressed.
BoE policymakers believe that inflation in the UK will reach its peak later than in other developed countries amid soaring energy prices and difficulties with their supply. In addition, the Bank of England said it would work on a plan to start selling the government bonds it has bought since the global financial crisis.
Following the meeting, the central bank kept its forecast for economic growth this year at 3.75% but slashed its forecast for 2023. It cut its growth projection for 2024 to 0.25% from a previous 1.0%. It downgraded the economic forecast for 2023 due to a possible contraction of the UK economy amid worsening financial conditions and increased energy prices.
Therefore, it is hardly surprising that the pound sterling is struggling not to slide to the bottom. However, after having analyzed its attempts to retain an uptrend amid rate hikes, many FX assume that the pound sterling is now testing the bottom. Yet, it may rise in the medium term.
