GBP/JPY Falls After BoE Raises Rates by 50bps. Why is That?

Summary:
• Warnings by the Bank of England of a long recession are taking a toll on the Pound, forcing the GBP/JPY lower despite 50bps hike.

The GBP/JPY has lost all its previous gains of the day and is now trading 0.5% lower after the Bank of England raised interest rates by 50 bps this afternoon. The rate hike met the market expectations and came via a unanimous vote by the BoE’s Monetary Policy Committee (MPC) members.

This was the largest single rate hike in 27 years by the UK’s apex bank, but commentary warning of a long period of recession by the bank has sparked off a selloff on the Pound across the board. The apex bank has forecast that consumer inflation in the UK could hit 13% by the end of 2022. The inflation outlook represents a significant upgrade from its previous forecasts 

of 10%. The BoE Governor Andrew Bailey hinted at this in his press conference following the rate hike announcement, saying that the UK could face the worst drop in living standards in 60 years due to a surge in energy prices and an increasing divergence between wage growth and inflation. 

Traders are responding negatively to the gloomy economic forecast by the BoE, and the Pound has lost early gains on several pairs. Things may get worse for the Pound as the BoE says it plans to start offloading the UK gilts it had massively acquired as part of its Asset Purchase Facility, with a timetable for commencement set for September. 

GBP/JPY Forecast

The pair is now challenging the 162.121 support level (9 May high and 2 June low). A breakdown of this level gives the bears access to the flag’s lower border at 159.988, where the 26 April and 16 June 2022 lows are found. A further breach of this border with a 3% closing penetration confirms the breakdown of the flag consolidation area, invalidating the pattern. This scenario will create a path toward 157.768, the site of previous highs of 5/12 January and 11 February 2022. This price mark is also a site where previous candles of 16-24 May 2022 tested but failed to break below. 

Suppose the bears achieve success in degrading this support. In that case, the 156.00 psychological price mark becomes the next downside target, followed by additional potential harvest points at 153.397 (24 February 2022 low), 152.108 (early September 2021 demand zone) and 151.042 (7 March 2022 low).

On the flip side, the bulls need to defend the 162.121 support and initiate a bounce toward 164.680 to negate the bearish bias. Above this level, the flag’s upper border will become the next resistance at the 166.243 price mark (17 June and 20 July 2022 highs). A break of this level confirms the flag’s completion, which creates a potential for a measured move that seeks completion at the 175.0 psychological price level, last seen on 1 February 2016. However, before this is accomplished, the bulls must uncap the barriers at the 168.376 price level (20 April and 8 June highs) and the 5 February 2016 high at 170.21. 

GBP/JPY Daily Chart