BoE Rate Hike Triggers Short-Lived Pound Spike

Holiday Trading Phase Begins

Last week’s multitude of central bank meetings created irregular volatility but also left market participants exhausted. As the Holiday season is drawing near, we can expect to see sideways movement on most FX pairs, with potential jumps in volume and volatility.

During last week’s meeting, the Fed announced that it will further taper the stimulus program by $30 billion/month and suggested that the interest rate may be hiked 6 times until the end of 2023. The ECB didn’t make any changes to its monetary policy, unlike the Bank of England who raised the interest rate by 15 bps to 0.25%, making it the first major central bank to hike the rate since the beginning of the pandemic.

According to the BoE, the decision to hike was made due to inflationary pressures. Governor Andrew Bailey said: “We’re concerned about inflation in the medium term. And we’re seeing things now that can threaten that. So that’s why we have to act “. The Pound jumped against the US Dollar but the gains were erased the next day and the greenback is on the assault once more. However, this week will lack major releases, thus we may see toned-down price action.

Key Events for the Week Ahead

It’s Christmas week and the releases are few and far between. The only high-impact announcement is scheduled for Thursday at 1:30 pm GMT: the Core PCE Price Index. This is rumored to be the Fed’s preferred inflation gauge but it is released about 10 days after the Consumer Price Index, which takes away from its impact. The expected reading is 0.4%, the same as the previous.

Other notable releases include the U.S. Final GDP, scheduled for Wednesday at 1:30 pm GMT, and the CB Consumer Confidence survey that comes out the same day at 3:00 pm GMT. These are not high-impact events but should be taken into consideration nonetheless.

Chart Analysis – GBP/USD

The pound jumped almost 100 pips against the US Dollar when the BoE announced the rate hike but the next day the entire climb was erased and currently the pair is trading very close to the support at 1.3200.

The recent price action established 1.3360 as resistance and 1.3200 as support but given the lack of volume which is specific to the Holiday season, the pair may be trapped in a sideways market until the end of the year.

However, keep in mind that low volume can also be a good catalyst for big moves (because the number of orders at S/R/ levels is lower), thus caution is advised. From a long-term perspective, the pair has a bearish bias, which favors a break of 1.3200 support.