GBP Falls on Divided BOE Hike

In stark contrast to the price action we’ve seen in EUR following the ECB, GBP has been on the backfoot following the December BOE meeting. The UK central bank pushed ahead with a further .5% hike as expected, taking rates to their highest level in 14 years. However, there was dissent in the ranks with voting split three ways, showing growing support for a slowing of rate hikes.

Looking ahead, BOE governor Bailey said that the bank expects inflation to begin falling sharply from spring 2023. Bailey said the BOE was already encouraged by the cooling of inflation seen last month which the bank noted had fallen more than it expected.  These comments alongside the voting split have been seen by the market as a precursor to a forth coming pivot on rates. The BOE warned last time around that it was not looking to continue with aggressive hiking and traders now sense that the BOE will be the next to hit the brakes on tightening, making GBP vulnerable to further downside near term.

Technical Views

GBPUSD

Price has been grinding higher with a bullish channel over recent months. However, we’ve seen bearish divergence creeping in on momentum studies into the latest peak, suggesting bearish reversal risks. The key level to watch near-term is the 1.2195 level. If price slips back below this level, chances of a downside break of the bull channel increase, opening the way for a test of the 1.1474 level next. While above 1.2195, however, 1.2659 is the next level to watch for bulls.