Consideration #1: A Hawkish Bank of England
The morning of Thursday, August 4, the Bank of England (BoE), the United Kingdom’s central bank, enacted a substantial interest rate hike: 50 basis points (bp), bringing the base rate up to 1.75%. The size of this hike is the BoE's largest since 1995, which had last occurred before it had even gained its current institutional independence from the British government. This hawkish development is timely, considering annual inflation in the UK is currently at 9.4%, the highest rate since 1982.
Consideration #2: Context is Key
However, this increased comfort with contractionary monetary policy from the BoE can also reasonably be interpreted as too little, too late. With the highest rate of inflation in the G7, it would be fitting for the BoE to likewise lead by example when it comes to tightening measures. Rather, their first 50 bp rate hike follows the Federal Reserve’s 75 bp hikes, and the Bank of Canada’s full 100 bp rate hike, not even exceeding market forecasts. This hike seems more akin to treading water than rising to the occasion, reminding us that historic doesn’t necessarily mean adequate.
My GBP Bias: Bearish
Despite the BoE’s historically hawkish move, this does not appear to signal a meaningful newfound commitment to subduing high inflation. Thus, I personally do not interpret the narrative surrounding GBP fundamentals to have changed, at least in any significant sense. Considering the lukewarm rate hikes, persistence of high inflation, and the plausibility of eventual stagflation in the UK, I will be looking for opportunities to short GBP against stronger currencies.
Best Pairs to Trade
According to the EdgeFinder, an A1 Trading tool for supplemental analysis, here are two of the most potentially promising pairs to trade for GBP bears: 1) GBP/USD, which earns a -4 ‘sell’ signal, and 2) GBP/JPY, which earns a -3 ‘sell’ signal.
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