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Bank of England is Ready for the Biggest Rate Hike in 27 Years
03.08.2022

England’s central bank is expected to announce its decision on interest rate hikes tomorrow. With soaring inflation numbers, the BoE is expected to raise the interest rates by 50 basis points or 0.50% - its largest single hike since 1995. This comes against the backdrop of a 40-year inflation high of 9.4%. Prices for food and energy are skyrocketing, worsening the already existing cost of living crisis in the country.

Based on a Reuters poll conducted with 65 analysts and economists, 70% are convinced that the BoE (Bank of England) will increase the rates by 50 basis points. Not all members of the MPC (Monetary Policy Committee) are expected to agree on a more hawkish decision, but analysts predict that the majority will vote in favor of a 0.50% hike.

The Pound appears to be edging higher on Wednesday ahead of the rate decision. The GBP/USD pair refreshed its daily high in the European session, with bulls eyeing to push the pair past the 1.2200 mark. The markets appear to be divided over the interest rate decision so investors will be focusing more on the closer-term economic outlook for the UK.

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Forex - USD/JPY

The US Dollar dropped to a two-month low against the Japanese Yen on Tuesday. But the US Dollar Index, which measures the performance of the US Dollar against six other currencies, was trading at 105.440, or 0.1% higher. This indicates that the currency pair slid because the Yen strengthened rather than because the Dollar weakened. In fact, traders turned to the safe-haven Dollar in light of the rising political tensions between China and the US. Following Nancy Pelosi's visit to Taiwan, demand for the Dollar rose, pushing other currencies down. EUR/USD was down 0.2% to 1.0236, while GBP/USD had shed 0.3% and was trading at 1.2207.

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Comments from several Fed officials on Tuesday reassured investors that the central bank would proceed with its hawkish approach towards inflation. This prompted the rise of the US 10-Year Treasury Note to 2.756%, and the 30-Year Treasury to 3.015%. Traders will be paying close attention to comments and hints from the Fed.

Commodities - Oil and Gas

Oil prices fall ahead of OPEC+ meeting on Thursday. There have been various reports from sources saying that the group is not likely to increase the output, but if they did, it would be a very small increase. Brent crude futures were down 1.3% at $99.20 a barrel, while West Texas Intermediate (WTI) crude futures fell 1.4% to $93.14 a barrel.

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The group faces a lot of pressure from the US to raise oil production, but several members of the group said they were tired of exhausting their out and concerned that if a major catastrophe happens, there wouldn't be enough oil to supply. According to analyst Stephen Brennock, "Even if the OPEC+ group did declare a small increase, the gesture would be largely symbolic given that very few members have the capacity to materially increase production."

On the other hand, one of the group members, Kazakhstan, says that the group might have to raise output to prevent the market from ‘overheating’ as prices have soared to $100 per barrel. This is yet another economic development that traders will be on the lookout for this week.

Key Takeaways

  • Markets expect a 50 basis points rate hike from the BoE tomorrow.
  • The Pound appears to be edging higher today ahead of the rate decision.
  • The GBP/USD bulls are eyeing to push the pair past the 1.2200 mark.
  • USD demand rose along with the political tensions between China and the US.
  • The 10-Year Treasury Note and the 30-Year Treasury Yield rose on hawkish Fed.
  • Oil prices fall ahead of OPEC+ meeting on Thursday.
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