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  • richard evans

BoE to raise rates 25bps or 50bps?

Good morning

US dollar remains firm as Fed officials continue to offer the same message, namely that the markets were a bit too premature in thinking the Fed would soon be done in their fight against inflation. Feds Daly, Bullard and Barkin were the latest to make this clear, confirming Feds commitment to getting inflation back to the 2% target. It isn’t so much what they say, it is the fact they all follow the same script, suggesting this is a real Fed view rather than just one or two members. Kashkari added this it is unlikely the Fed will cut rates in 2023. A rise is the US ISM yesterday also gave the market some confidence that perhaps the Fed are right. A lot of attention as always will be on the US employment numbers out tomorrow.

Pelosi may have left Taiwan but we still wait to see the full repercussions of the visit. Taiwan have also been hit by cyber-attacks and China announced several bans around exports and imports to and from Taiwan. China are conducting large military drills around Taiwan which, even to the untrained eye looks very much like a warm up for an invasion. Certainly a show of force. A US carrier group is in the area which makes everyone a bit nervous.

GBPUSD currently 1.2170, EURUSD 1..0180 making GBP a little lower against EUR, now 1.1950. Recently both GBP and EUR have been driven by USD sentiment, however that could change for GBP today with BoE rate announcement.

USDJPY continues to jump around, trading as low as 130.40 a couple of days ago but reached a high of 134.55 yesterday, currently just a few pints off that level. EURJPY is back up to 136.50, GBPJPY currently 163.15.

AUD moves higher, helped by a larger than expected, and a record trade surplus announced overnight. AUDUSD moved from 0.6935 to 0.6985 after the release, AUDNZD holds around 1.1050 but a look at GBPAUD shows the pair has managed to trade down from above 1.7600 yesterday morning to 1.7450 as I type.

BoE rate announcement today, a 50bps is expected which would take rates to 1.75% although a smaller 25bps rise is not out of the question. We should also see revised forecasts which may well suggest inflation could be well above 10% next year as BoE admit high inflation will last longer than previously hoped. A 50bps rise might be enough to show the markets BoE mean business, but the key may well be the wording of the accompanying statement for an idea of future plans regarding rate rises. Sounds too easy but a 25bps rise should see GBP lower, while a 50bps rise should see GBP higher.

I think the risk of a 25bps cut is understated and as such look for GBPUSD downside. An overnight 1.2100 GBPUSD put costs around 35usd pips ($3,500 per GBP1m notional), bear in mind this takes in not just the BoE rate announcement but also the US nonfarm payrolls tomorrow. A reasonably low cost idea with risk limited to just the premium paid.

- 09.00 ECB economic bulletin

- 12.00 BoE rate announcement

- 12.15 BoEs Pill speaks

- 13.30 US initial jobless claims

- 13.30 CAD trade balance, building permits

- 15.30 ECBs Elderson speaks

- 17.00 Feds Mester speaks

- 00.30 Japan household spending

- 02.30 RBA monetary policy statement

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