The pound rose after the Bank of England unexpectedly raised the key interest rate by half a percentage point, intensifying the fight against the worst inflation surge since the 1980s and warning that it may need to act similarly in the future. However, the bullish momentum fell short of reaching the monthly highs, as pound sellers became quite active again. But we will discuss the technical picture a bit later.
As it was announced today, the nine-member Monetary Policy Committee voted 7 to 2 in favor of raising the rate to 5%, which is the highest level in 15 years and the largest move since February of this year. The markets assessed the probability of such an outcome at 40%, while most economists expected an increase of only a quarter of a point.
After the meeting, Governor Andrew Bailey reiterated previous forecasts indicating higher rates in the near future. He did not mention whether the rate would reach a peak of around 6% by the beginning of next year, which is currently the main focus of economists and traders. Apparently, that's why the pound did not experience another record rise. "The economy is performing better than expected, but inflation is still too high, and we need to deal with it," Bailey said. "We know it's tough—many people with mortgages or loans for understandable reasons will be concerned about what awaits them in the future. But if we don't raise rates now, it will be even worse."
Currently, the market expects a 30% probability that the key rate will reach a peak of 6.25% by February of next year, implying an additional increase of one and a quarter percentage points.
High inflation is the most serious economic problem not only for the United Kingdom but also for several other countries. The fact that the central bank enjoys full government support in its efforts to return inflation to the target level represents a fairly coordinated policy that will eventually bring success.
According to forecasts by several economists, the cost of borrowing will continue to rise not only in the UK but also in several other countries. Federal Reserve Chairman Jerome Powell stated yesterday that after the committee suspended its tightening measures last week, it is likely that rates will start rising again as early as July of this year. In the eurozone, a number of policymakers speaking this week also expressed the need to combat high inflation in the region. The UK is no exception in the Group of Seven, where consumer prices rose by 8.7% in May, four times higher than the Bank of England's target of 2%.
Such moves by the regulator do not bode well for the mortgage market. Quite recently, rates on two-year mortgage loans in the UK tripled to over 6%, and experts are warning of a "delayed action mortgage bomb" as households are being heavily burdened with debt.
As for the currency market, the pound clearly responds to this type of policy, and the observed rise from 1.2370 to 1.2840 in June is evidence of that.
As for the technical outlook for GBP/USD, demand for the pound remains strong. We can anticipate further growth of the pair after gaining control above the 1.2800 level, as a breakthrough of this range will strengthen hopes for further recovery towards the 1.2880 area. After that, we can consider a more significant upward surge towards the 1.2920 level. In case of a decline, bears will attempt to take control around 1.2740. If successful, a break below this range will hit bullish positions and push GBP/USD towards a low of 1.2690 with the potential to reach 1.2630.
Regarding the technical picture of EUR/USD, to maintain control, buyers need to climb above 1.1000 and settle there. This will allow a move towards 1.1030. From that level, a further ascent to 1.1060 is possible, but achieving this without favorable data from the eurozone could be quite challenging. In the event of a decline in the trading instrument, I expect buyers to act around the 1.0960 area. If there is no significant activity there, it would be advisable to wait for a retest of the 1.0910 low or consider opening long positions at 1.0860.
