Investors who were anticipating that soaring inflation in the UK would convert some BoE doves were left slightly disappointed on Thursday after the MPC voted 7-2 in favour of keeping the rate unchanged.
The initial disappointment triggered a knee-jerk reaction lower on the GBP/USD, before prices rebounded higher, as market players digested the hawkish policy statement. With the central bank stating that it could “reduce stimulus in the coming months” if inflationary pressures continue to mount, Sterling is likely to remain supported this week.
While the Bank of England has indicated that interest rates could rise faster than markets expect, if the economy keeps growing, actions will always speak louder than words. It should be kept in mind that the unsavoury combination of rising inflation, subdued wage growth and Brexit uncertainty has placed the central bank in a very tight spot. It becomes a question - will the BoE eventually raise rates to tame inflation, which is currently squeezing UK household? Or will tepid wage growth, concerns over the health of the UK economy and Brexit uncertainty keep the central bank on standby?
Things could get more interesting for Sterling moving forward, with more volatility expected as the currency becomes increasingly sensitive to monetary policy speculation.
From a technical standpoint, the GBP/USD bulls have won the battle this week, as the currency trades to a fresh yearly high above 1.3320. Prices are bullish on the daily charts, with today’s hawkish boost by the BoE likely to support a further incline towards 1.3400. This bullish setup remains valid, as long as prices can keep above the 1.3150 higher low.