BoE preview: BoE set for two consecutive hikes?

When will the BoE rate decision be announced?

The BoE interest rate decision is due to be announced on Thursday February 3rd at 12:00 midday.

What to expect?

In December the BoE voted 8-1 in favour of raising interest rates by 0.1%, a move which caught the market off guard, given the 7-2 vote to in favour of keeping interest rates on hold the month before. Yet with CPI rising to 5.1% YoY on November, policy makers were clearly uncomfortable with such elevated levels of inflation and were confidence that the UK labour market was able to pick up the slack from the furlough scheme.

Since then, inflation continued to rise, reaching 5.4% in December the highest level since 1992. Inflation is expected to continue rising, with the BoE suggesting that it could reach 6% by the start of the second quarter as energy prices continue to rise. The current Russia Ukraine geopolitical tensions mean that energy prices are unlikely to ease any time soon. Furthermore, BoE governor Andrew Bailey said in a speech that firms were considering raising prices and wages this year at a pace which would add to the inflationary picture.

Meanwhile, the Omicron hit to the economy is expected to be brief and contained as the government has already reversed the Plan B restrictions.

Rising inflation expectations and easing COVID concerns could see the BoE raise interest rates again on Thursday, which would mark the second hike in under two months.  According to the CME BoE watch tool, the markets is 100% pricing in a rate hike this week to 0.5%.

However, BoE officials have been unusually quiet since the last meeting, so a February rate hike is still not a done deal. Given that it has been fully priced in, a decision not to hike could provoke a larger reaction.

New growth forecasts will also be published. Will the BoE see the need to raise interest rates much above neutral to tame inflation? Currently the market sees rates to rise to the pre-pandemic 0.75% in May and 1.25% by November.

Where next for GBP/USD?

GBP/USD is extending gains from the 1.3360 low reached las week. The price has retaken a key resistance at 1.3450, which along with a bullish MACD are keeping buyer’s hopeful of further gains.

Immediate resistance csa be seen at 1.3480 the 50 sma on the 4 hour chart. A break above here could open the door to 1.3525 last week’s high a move above here could see the buyers gain momentum.

On the flip side, failure to hold over 1.3450 could see the price fall back towards 1.3350 and 1.3240.