GBP/USD FUNDAMENTAL HIGHLIGHTS:
The Bank of England delivered the largest rate hike since 1995, with a 50bps rise in the Bank Rate. However, they also delivered arguably one of the most dovish 50bps hikes in history, thus weighing on the Pound to retest the 1.20 handle against the greenback. The BoE projects the UK to enter a recession in Q3, lasting five quarters with GDP falling to 2.1%. What’s more, the BoE raised their expectations of peak inflation, now seen at 13.3% in October, up from above 11%. As such, the Pound, which has been the poster child of stagflation will continue to face downside risks.
Elsewhere, the BoE also highlighted that based on market implied rates, which see the Bank Rate going to 3%, inflation over the three-year horizon is projected to fall to 0.8%. The lowest projection ever over this horizon, therefore sending a clear message that not only do markets remain far too aggressive on the BoE tightening but also that rate cuts could be coming sooner than expected.
Source: Bank of England
Meanwhile, in the US, stellar Non-Farm Payrolls have partially reduced those recession concerns for now and more importantly, pushed back on the notion that Powell provided a Fed pivot in his recent post-Fed decision press conference. That being said, as we look to next week, the big focus will be on the US CPI report. Should we see another topside surprise, this would likely fuel a break of 1.20 in Cable, while a downside miss puts 1.22 back in focus.
MARKET REACTION TO US CPI