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The Bank of England raised its interest rate by 25 basis points to 4.25% at its meeting on Thursday, as markets expected, and allowed further tightening of monetary policy. The central bank said if there are signs of more persistent pressure, further tightening of monetary policy will be required.
Indeed, the consumer price index released the day before unexpectedly added 1.1% in February after declining 0.6% the previous month. On an annualized basis, the CPI jumped to 10.4% (from 10.1% the month before) for the first time in four months. In addition, the retail price index rose 1.2% in February (after zero growth a month earlier). On an annualized basis, the retail price index rose from 13.4% to 13.8%. Both cases turned out higher than economists' forecasts.
At the same time, even though the leaders of the Bank of England stated that further tightening of policy is possible, many economists believe that after the March meeting, the heads of the British central bank will take a pause in raising, given the difficult foreign and domestic economic conditions in the country.
After the announcement of the decision to raise the rate, the pound strengthened rather briskly, and the GBP/USD pair reached an intraday high of 1.2342, also corresponding to 7-week highs.
The pair subsequently declined, but yesterday and today the pound, as a risky currency, got support from the improved investor sentiment after the positive news on the American banking sector. U.S. company First Citizens Bancshares Inc. said it was ready to buy part of the Silicon Valley Bank loan portfolio. This decision contributed to the reduction of panic moods and decline in outflow of deposits from medium and small banks of the country.
But so far, the rise of GBP/USD can be attributed more to the technical correction of the dollar amid the improvement of investors' sentiment about the future prospects of the banking sector in the U.S. and Europe. Moreover, economists and market participants expect the Fed to take a break and not to raise the interest rate above the current level of 5.00% in the course of the May meeting.
Tomorrow, market participants who follow the pound and the GBP/USD will pay attention to the publication of the quarterly report of the Bank of England's Monetary Policy Committee (MPC), which might reveal plans for the future monetary policy, February data on consumer lending in Britain and the minutes of the Bank of England's MPC (last week), which might also contain information on the future monetary policy of the British central bank.
Today, investors will pay attention to the release (at 13:30 GMT) of the January data on the U.S. housing market, the Conference Board report (at 14:00) with data on the level of confidence of American consumers in the economic development of the country and in the stability of their economic situation, and, also at 14:00, the Richmond Fed Manufacturing PMI. Weak data of the above reports may cause a weakening of the dollar and, accordingly, a further rise of GBP/USD.
Globally, below the key resistance levels 1.2670, 1.2830, GBP/USD remains in the zone of a long-term bear market, and a breakdown of support levels 1.2130, 1.2070 will signal a revival of the general downward trend.
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