GBP/USD: Fed and Bank of England meetings results
The pound weakened sharply, and the GBP/USD fell after the Bank of England published a decision on the results of its regular meeting that ended today at 11:00 (GMT). At the time of this article's publication, the GBP/USD was near 1.2385, 237 pips below today's opening price.
The Bank of England raised the key interest rate to 1.0% from 0.75%, and the majority of the members of the Monetary Policy Committee felt that "further interest rate hikes may be appropriate." The minutes of the Bank of England meeting also showed that the number of votes cast in favor of raising the key rate was 9 out of 9. Three of the Monetary Policy Committee voted in favor of raising the key rate to 1.25%.
However, the pound fell after the publication of this decision. While markets are predicting the key rate to rise to 2.5% by mid-2023, the Monetary Policy Committee will be able to raise rates only once more this year, and this will probably happen in August. This is not a very positive factor for the pound, while the tightening cycle is accelerating in other major world central banks.
The Bank of England also lowered its forecast for GDP growth in 2024 to 0.25% from 1%, and in 2023 the Bank of England now forecasts a contraction of GDP in 2023 by 0.25%, while before it was a growth of 1.25%.
Meanwhile, the US dollar resumed growth after yesterday's decline. As you know, the Fed yesterday decided to raise interest rates by 0.50% and announced the beginning of the reduction of its balance of assets in the amount of 9 trillion dollars next month.
The US central bank typically raises rates by 0.25% at a time, and the last half percentage point hike was in 2000. Now the Fed is pursuing the most aggressive tightening of monetary policy in decades, rapidly winding down stimulus measures that have fueled inflationary pressures. The actions of the central bank are aimed primarily at fighting inflation, which has reached a maximum in four decades. "The committee is very carefully assessing inflationary risks," the central bank said.
"Inflation is too high, and we understand what difficulties it causes. We are taking prompt action to reduce it," Fed Chairman Jerome Powell said on Wednesday as part of a press conference following the meeting.
Shrinking the balance sheet is another way of winding down stimulus measures and driving up borrowing costs. According to the Fed's plan, the amount of government bonds and mortgage bonds held by the central bank should decrease monthly by $30 and $17.5 billion, respectively, in June, July and August. After that, the rate of reduction will accelerate to $60 and $35 billion, respectively.
"The Fed's Open Market Committee is broadly leaning towards considering further rate hikes of 50 basis points over the next few meetings," Powell said.
Thus, the dollar has every chance to accelerate its growth, primarily due to the toughest policy of the Fed among all the world's largest central banks.
At the time of writing, the DXY index was near 103.31, 63 points below the local 2-year high of 103.94 hit last week and in close proximity to 104.00. With a high degree of probability, it will soon be broken, and the dollar will continue its growth, including in the GBP/USD pair.