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Fed set for 50 basis point hike, but what about the BoE?

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4 May 2022

Written by
Matthew Ryan

Senior Market Analyst at Ebury, Chartered Financial Analyst. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Most currencies have traded within relatively narrow ranges during the bank holiday shortened week so far, as investors await major central bank meetings in the coming days.

he Federal Reserve will kick things off on Wednesday evening by announcing its latest policy decision. Expectations are high heading into the May FOMC meeting, which is expected to deliver the Fed’s first 50 basis point interest rate hike in more than two decades. Speaking during an IMF panel of central bankers last month, FOMC chair Jerome Powell stressed that it was ‘absolutely essential’ to restore price stability, and that rates would need to be raised ‘expeditiously’ in order for the bank to reach its goals. Markets have subsequently ramped up bets in favour of an aggressive pace of US hikes this year, with fed fund futures now pricing in more than 250 basis points of tightening by year-end.

With such an aggressive pace of hikes already priced in by markets, we think that the bar for a hawkish surprise from the Fed is now very high. A 50 basis point hike will be seen as the bare minimum – we think that it is a nailed-on certainty. There will be no updated macroeconomic or interest rate projections – the Fed’s next ‘dot plot’ won’t be released until June. Powell’s communications on additional rate increases, and the bank’s latest view on the inflation overshoot will, however, be closely watched. We expect Powell to keep the door open to an aggressive pace of hikes during the remainder of the year. While Powell won’t pre-commit to rate increases at specific meetings, he will almost certainly reiterate that rates could be raised at every meeting in 2022.

Attention in markets will then quickly turn to Thursday’s Bank of England meeting, with a fourth consecutive interest rate hike widely expected. Markets are fully pricing in a 25 basis point move, with a non-negligible chance of a 50 basis point rate increase. The key to the market reaction will, however, likely be the MPC’s comments on future interest rate hikes. Recent communications from BoE members have been resoundingly dovish, and there is as of yet no real reason to suggest that a U-turn on this stance is likely tomorrow. Governor Bailey has warned in recent remarks over the downside risks to UK growth, even suggesting last month that a recession is a possibility.

While we think that Bailey’s comments have been overly pessimistic, most members appear to share similar views. That said, with UK inflation running very hot, we could see a bit of division among the committee. Even a vote or two in favour of a 50 basis point hike tomorrow would be bullish for the pound, whereas two or more votes in favour of no change would be perceived as dovish and could trigger another bout of sterling weakness.

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