Sterling Jumps as Investors Expect a Hawkish BOE

The Bank of England (BOE) will become the third major bank to deliver its interest rates decision in the past 24 hours. The bank is expected to leave rates unchanged at the current level of 0.75% and unlike other central banks, it is expected to sound a bit hawkish in its statement. According to Reuters, the bank is expected to point towards more interest rates hikes. This will come a few days after Mario Draghi announced that the ECB will likely implement stimulus to sustain the growth in the economy.

The BOE interest rates decision comes at a time when the UK is at crossroads. The conservatives are in the process of electing the new party leader, who will become the prime minister after Theresa May resigned. Already, indications are that the next prime minister will be Boris Johnson, a Eurosceptic who has vowed to implement Brexit on October 31 whether there is a deal or not.

In a statement to be made today, the chancellor of the exchequer, Philip Hammond is expected to warn the conservatives against voting for a person who is prepared to see a no-deal Brexit. However, this speech will likely not stop Johnson, who commands a leading majority against Dominic Raab, his closest competitor.

In a statement last month, Governor Mark Carney warned investors against underestimating how much interest rates could jump. Therefore, while the rates will be left at the current level of 0.75%, signs indicate that the bank will tighten in the coming meetings.

This will be the first major central bank to sound hawkish. Earlier this month, the Reserve Bank of Australia (RBA) became the first major bank to slash rates. Yesterday, the Fed released a dovish statement, which is an indication that the rates could fall this year. The ECB last week warned that it would implement more stimulus. The same statement was repeated by the BOJ, which sounded a bit dovish earlier today.

Ahead of the BOE decision, the sterling has strengthened against the USD. This week, the GBP/USD pair has risen from a low of 1.2500 to a high of 1.2690. On the chart below, this is above the 50-day and 25-day moving averages while the RSI has soared from below 10 to above 70. Later today, the pair will likely rise to above 1.2700 or decline to the support of 1.2650.

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