Short-term interest rate markets are pricing in an 84% chance of a 25bps rate hike from the BoE and another hike in the summer. The UK is fighting headline inflation still in the double digits and the core is at 6.20% y/y, so all is well above the UK’s 2% inflation target.
These expectations for the BoE to hike on Thursday’s meeting have been growing for some time, so how will the GBP react? Interestingly, the GBPUSD shows a clear bias leading into and out of BoE rate hikes. Over the last 15 years, when the BoE has hiked rates, the GBPUSD has fallen an average of 1.01% on the day before and after the meeting. This hike has been well expected by markets, so will we see the GBP weaken out of the decision on Thursday?
Major Trade Risks: The major trade risk here is if the BoE signal even higher rates to come as that will surprise markets and likely send the GBP even higher.
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