Cable Disappointed By BoE’s Dovish Hike

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As widely expected, the Bank of England raised the benchmark interest rate by 25bps to 0.75%. In a knee-jerk reaction to the decision, the cable dropped sharply as eight of nine MPC members voted to hike rates - Cunliffe voted to leave rates unchanged at 0.50%. Considering that the markets had priced in 40% chances of a 50 bps rate hike, the decision was assessed by traders as a dovish one. 

In the accompanying statement, the central bank sounded slightly less hawkish than last month. The monetary authorities said that "some further modest tightening might be appropriate in the coming months". Furthermore, the bank highlighted that there are risks on both sides of its policy depending on how inflation prospects evolve. Of note, the developments surrounding Ukraine add to economic uncertainty globally. 

As sterling bulls had expected a more hawkish rhetoric from the central bank, the GBPUSD plunged from 1.5-week highs seen above 1.3200 to settle around the 1.3100 figure as traders were digesting the hesitant tone by the Bank of England ahead of the North American trading session. In a wider picture, the pound stays bearish as well, with the pair trading marginally above the 1.3000 mark that capped the sell-off earlier in the week. 

In the near term, the optimism over a possible diplomatic solution to the Russia-Ukraine conflict will likely continue to weigh on the safe-haven greenback, thus capping GBPUSD’s downside potential. Still, there is a risk of a break below the 1.3000 critical support should risk aversion reemerge in the coming days or weeks. On the upside, the descending 20-DMA, currently at 1.3280, represents the immediate significant resistance.