BoE Holds the Line; Vote Split Change Triggers Dovish Reaction

8-1 Vote in Favour of Bank Rate Hold

Following the Fed holding its Fed funds target rate at 5.25%-5.50%, and the Swiss National Bank (SNB) surprising markets this morning and cutting its overnight Policy Rate by 25bps, the Bank of England (BoE) followed the Fed and left the Bank Rate on hold at 5.25% (a 16-year peak) for a fifth consecutive meeting.

This will not raise too many eyebrows as it was widely expected, but what was unforeseen was the MPC voting by a majority 8-1 to keep rates unchanged. Today’s MPC meeting observed two members (Jonathan Haskel and Catherine Mann) downshift their votes to hike the Bank Rate in favour of a hold, and Swati Dhingra continued to vote for a 25bp cut.

In light of the recent shift in votes, this is a central bank manoeuvring towards easing policy. It has echoed a clear dovish tone, which could really start to influence the GBP in terms of a notable headwind.

According to the latest ONS report, CPIH inflation slowed to 3.8% in the twelve months to February, down from January’s reading of 4.2%. The CPI witnessed year-on-year consumer prices cool to 3.4% in February from 4.0% in January, and month-on-month CPI rose 0.6% in February from -0.6% in January. Underlying inflation (core) eased to 4.5% on a year-on-year basis for February, down from 5.1% in January, whilst the month-on-month rate increased to 0.6% in February from -0.9% in January.

In view of the latest inflation numbers (CPI inflation is used for inflation targeting), the BoE, according to the MPC Statement, projects inflation to fall to slightly below its 2.0% inflation target in Q2 of 2024, and ‘services inflation is anticipated to fall back gradually’ (services inflation remains elevated at 6.1%, though slowed from 6.5%).

The Statement also maintained the sentence: ‘Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates’.

Modest Dovish Repricing

In terms of BoE rate pricing, we’ve also seen a dovish repricing, with the OIS curve leaning towards a 25bp cut at June’s policy meeting (-20bps [-15bps of easing was priced in prior to the release]), though August’s meeting is still fully priced in for the first 25bp cut (-39bps). So, as of now, we are looking at a cut to materialise either in June or August. For the year, around 80bps of easing is priced in, up from 75bps prior to the release.

GBP Lower Against G10 Peers

Sterling lost ground against the majority of its G10 counterparts following the release, with Gilt yields also trading lower—2-year Gilt yields dropped 12bps to just north of 4.00%—and the FTSE 100 jumped to highs not seen since mid-2023.

GBP/USD at Short-Term Support

As shown on the H1 chart of GBP/USD, we are now testing short-term support between $1.2710 and $1.2724, an area made up of two horizontal support levels and two Fibonacci retracement ratios. You may also acknowledge the nearby trendline resistance-turned-potential support, taken from the high of $1.2894.

Given current market sentiment and the likelihood of further downside for sterling, the above-noted support area is unlikely to welcome much in the way of solid buying. With that being said, a H1 close south of the zone could attract breakout selling in the direction of support coming in at $1.2673, nestled just south of the $1.2685 20 March low.

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