UK interest rates are set to be raised by the Bank of England for the 12th successive time later on Thursday as the GBPUSD continues to flirt with its strongest levels in around one year. There will be more on the GBPUSD and British Pound impact below. However, the expected move from the UK central bank will see interest rates in the United Kingdom raised to levels not seen since 2008.
Why have UK interest rates been raised to such an extent? Because the UK economy remains stuck between a rock and a hard place when it comes to inflationary pressures. Headline inflation readings remain above 10%, as much as five times more than the standard BoE target. The unfortunate reality is that the UK central bank has been far too conservative when it comes to tackling inflation.
Even more UK rate rises remain possible
Even when the BoE raises interest rates later on Thursday, the likelihood is that we are looking at as many as a further potential one or two UK interest rate increases before 2023 concludes. If the BoE was not so conservative and would have mirrored raising interest rates at a similar pace to US peers (Federal Reserve), there is a chance that UK inflationary pressures would not remain so persistently extreme. They would still be present, but perhaps not at such elevated levels.
Albeit that the unfortunate nature of having the title as being host to the economy with the highest inflation in the G7 is because of external headwinds that led to the inflation bubble, questions must be asked of the Bank of England over why it has not been more aggressive.
Why is it that conversations are already taking place regarding potential interest rate cuts in the United States following such an aggressive period of US interest rate increases? While the fact of the matter is that the BoE are more likely than not still months away from saying to the market that UK interest rates have been raised as to the limit of what can be done.
How come when the UK economy was hit with the previous external shock, and by this we mean the pandemic, that headlines also read that it would impact the UK economy the most out of advanced nations? Again, such a matter was unforeseen but there is no coincidence that the UK is sensitive to sudden world events and the central bank holds responsibility through setting monetary policy for reacting to such matters.
Unfortunately, the matter of fact is that the BoE has been too slow and done too little in its attack of inflation. As a result, the conversation will remain ongoing regarding the need for even higher interest rates for months. Irrespective of what happens a few hours from now.
GBPUSD could be looking at new highs
This one has gone under the radar while many global financial assets continue to fluctuate in a choppy trading environment, but the GBPUSD has moved by close to 7% higher through 2023 so far. This has taken the British Pound to levels not seen against the Dollar in approximately just over one year.
There is still a chance for the GBPUSD to strengthen even further, which would over the longer-term help limit UK inflationary pressures through reduced price pressures of imports.
As the Bank of England will be quizzed heavily regarding the future outlook of UK interest rate increases, there is a chance that hawkish (upbeat) language coming from the UK central bank will lift buying sentiment for the British Pound.
1.30 is an ambitious target as the UK economic fundamentals remain uninspiring but the handle around 1.27 appears fair-value for GBPUSD for as long as there are no sudden shifts in expectations for the US Dollar.
Ambitious traders on a technical level might even suggest that 1.28 is possible before the end of the second quarter of 2023. 1.25 is likely to act as a support level that might be used as a line in the sand for sellers, but the outlook for GBPUSD from a technical perspective should remain optimistic for as long as the GBPUSD can remain above 1.25.
What else to monitor in markets?
The UK interest rate decision will be the main focus of trading today, but we can also look for potential news flow stemming after Wednesday’s latest US inflation report.
In the grand scheme of things, the inflation report did not tell us enough regarding what the Federal Reserve will be thinking regarding long-term US interest rate strategy. However, the signs of inflationary pressures easing (to some extent) at least suggests that the US central bank will not be pushed into increasing interest rates in the United States even higher imminently.
From a fundamental perspective, this suggests that softness in momentum for the US Dollar is on the cards and this might present an opportunity for assets to obtain some strength against the Greenback.
