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16.12.202207:18 Forex Analysis & Reviews: BoE raises key interest rate by 50bp and disappoints traders

Yesterday, three central banks held their meetings. We have already discussed the Fed's meeting. Jerome Powell said that the regulator will continue to raise the benchmark rate. The economic outlook was cut, but inflation goes on falling quite rapidly. Notably, the risk of a recession is not very high. Markets got this information on Wednesday. Yesterday, the Bank of England raised the benchmark rate by 50 basis points as expected. This decision disappointed traders who planned to use such an important event to boost demand for the pound sterling. Notably, during the last two weeks, the euro and the pound sterling have been rising without strong reasons. Six members of the BoE's committee voted for the 50-basis-point hike, whereas one member voted for a rise of 75 basis points and another two members voted against any key rate hike. According to the BoE, the UK economy has already entered a recession. However, in the 4 quarter, the economic downturn is likely to slacken. Next year, the consumer price index will continue to fall. The regulator has already started to slow down the pace of the key rate hike. The fact is that the recession could be deeper than expected if the regulator remains stuck to an aggressive approach.

Exchange Rates 16.12.2022 analysis

The BoE also emphasizes weak consumption among households and worsening conditions in the UK real estate market. Inflation showed the first drop only in November. That is why it is too early to predict the pace of the decline and the number of interest rate hikes. The Federal Reserve is now conducting the most confident policy aimed at lower inflation. In the US, the CPI has been falling for 5 months in a row at quite a rapid pace. The key rate has already hit 4.5% and could rise by 2 or 3 times.

Judging by the situation, the US dollar may start gaining in value since the factor of the key interest rate now is of less importance. If the asset does not launch the formation of a long-lasting downward section of the trend, it is likely to form a 3-wave correctional structure. The same could be said about the euro/dollar pair.

The European Central Bank also raised the benchmark rate by 50 basis points. Thus, all three central banks hiked their key rates by the same number of basis points. That is why the market reaction was quite modest. The benchmark rates were hiked as expected and the heads of the central banks provided comments as usual. Both trading instruments were moving in a usual manner.

Exchange Rates 16.12.2022 analysis

Thus, the formation of the upward section of the trend complicated to a 5-wave structure and is now approaching its end. In this light, traders may go short with the targets located near 0.9994, which corresponds to the 323.6% Fibonacci level. The upward section could become even more complicated and longer. That is why a sell signal remains strong.

A wave analysis of the pound/dollar pair showed a formation of a new downward section. Traders are better to avoid buy orders since the formation may start at any moment. Sell orders could be initiated with the targets near 1.1701, which corresponds to the 161.8% Fibonacci level. However, wave e could become even longer.

*A análise de mercado aqui postada destina-se a aumentar o seu conhecimento, mas não dar instruções para fazer uma negociação.

Chin Zhao,
Analytical expert of InstaSpot
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