Effects of the Bank of England rate hike

Introduction

The Bank of England raised the overnight rate from 0.25% to 0.50% yesterday. This is quite significant because it’s the first rate hike in a decade. The inflationary pressure was the key point in this decision. Some members were demanding a rate hike a long time ago. However, in the Bank’s policy statement, they cautioned that further increases in the overnight rate will be gradual and related to the performance of the economy.

My opinion

I understand that they raised the base rate in order to offset the growing inflation. Up to this point, everything is clear. But, considering that the Brexit negotiations haven’t progressed enough, I don’t think that is the best decision at this moment. According to Barnier, the European Chief Negotiator for Brexit, the Brexit talks could take months to progress. So, I think the BoE has taken the initiative to hike the rate as a temporary measure and the Bank’s policy statement confirms that it will be gradual. In the case of a hard Brexit, they can lower the overnight rate again or even support the economy in a different way until getting new trade agreements.

What was the market reaction?

I think the big credit traders and the institutionals thought the same as me. The British Pound plunged. The Long Gilt, the equivalent of the 10 T-Note and the Euro-Bund, rose. The UK interest rates, known as Short Sterling Futures, jumped showing the disappointment of this decision. Let’s see the movements more in detail.

GBPUSD December 2017 future

     Source: TradingView, GBPUSD Dec17 Future, daily

This is a daily chart that shows the scale of the movement yesterday. It opened at 1.3266 and it closed at 1.3071, big drop. Early in the morning was rising and it tested the resistance at 1.3318. After that and driven by the disappointment from the market participants it fell. In its way down, the support at 1.3157 was broken and fell to the next support (1.3063)

     Source: TradingView, GBPUSD Dec17 Future, 30 min

Here you can see in more detail the movement. It was falling in the morning, but when the interest rate hike was announced, the volatility came to play. Usually, if the economy is strong and performing well, an interest rate hike boosts the currency. In that case, the market participants thought that was not the best moment to hike rates.

EURGBP 

      Source: TradingView, EURGBP FXCM CFD, 30 min

This is the Euro vs the British Pound. The reaction was the same. The major movement happened in 30 min this is why I’ve chosen this time frame.

Long Gilt 

     Source: TradingView, Long Gilt OANDA CFD, Daily

The UK 10 Year Bond future made a very technical movement because it respected the resistance at 125.756. It’s true that at this point, and considering the importance of the level, the most part of the traders considered to sell or take profits. But let’s check this better in the following chart:

     Source: TradingView, Long Gilt OANDA CFD, 15 min

I’ve chosen 15 minutes because I can explain better each candle. We can see that was barely flat before the announcement. At 12:00 UK time, as soon as the BoE confirmed the rate hike, this bond rose driven by the buying pressure. I consider the next candle as a Doji pattern because the buyers and the sellers were conflicting. At this point, and due to the big movement, I believe that some firms were taking profits. The next candle broke higher but failed to close above the resistance at 125.75. This level was used to take profits and open short positions because the movement since the announcement was big. Around 14:00, the buyers came to the market helping to close at the highs of the day.

As a curiosity, I would like to share this article from Efinancialcareers:

https://news.efinancialcareers.com/uk-en/300035/bankers-london-mortgages/?utm_source=GLOBAL_ENG&utm_medium=SM_LI&utm_campaign=FANS

Conclusion

In normal conditions, an interest rate hike makes the value of the currency going up as well as the interest rate yields. The Brexit shadow appeared after the rate hike and this is why the British Pound and the bond yields plunged. I haven´t focused on the UK short-term interest rate futures, known as short sterling futures,  but they rose significantly showing the disappointment with the decision. I can understand that the Bank of England did it as a temporary measure to try to fight with the high inflation and the high level of personal debt. The future path of the rate hikes in the UK depends on the Brexit negotiations, and I don’t see any significant progress on them.  The market is pricing all of these facts. I like to follow the interest rate markets because you can see what´s going on without reading the news. As always, I hope you like this post.

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

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