Pound steady as BoE rate decision looms

The British pound has posted slight gains in the European session, as GBP/USD trades just shy of the 1.33 line ahead of today’s key BoE meeting.

Will BoE hit the rate trigger?

All eyes are on the Bank of England, which must decide whether to raise interest rates. This week’s inflation and employment data certainly pull in favor of a rate hike. Inflation jumped to 5.1% y/y in November, the highest level in 10 years. The labour market continues to tighten, as unemployment rolls fell for a seventh straight month.

The elephant in the room is the Omicron variant, which although milder than Delta, is some 70 times more contagious and has sent infection rates skyrocketing in the UK. The markets are betting that the BoE will refrain from a hike today, and revisit a rate move at its next meeting in February. By then, the bank will be in a better position to evaluate the damage to the economy from Omicron. The bank shocked the markets in November when it didn’t raise rates, after signalling that it would due to the threat from inflation. The pound took a tumble as a result, but I don’t expect a repeat performance since the markets have priced in the likelihood that the BoE won’t raise rates. If the BoE surprises with a rate hike, the pound should record significant gains.

The markets were anticipating a hawkish turn from the FOMC, and policy makers did not disappoint. As expected, the Fed announced that starting next month it would scale back bond purchases at double the pace, to USD 30 billion/month. This means that the bond purchases will end in March rather than July, putting the Fed in a position to raise rates earlier. The dot plot showed that 18 FOMC members are projecting at least one rate hike in 2022. This is a major shift from the September meeting, when members were evenly split. As well, 12 of the 18 members expect three rate hikes next year.

In its statement after the meeting, the Fed explained that the sharp increase in the taper was due to inflation developments and the further improvement in the labor market”. This is significant because it states in black and white that the Fed has taken off the gloves in order to fight inflation. Just a few weeks ago, Fed Chair Powell was insisting that inflation was transitory, before abandoning this stance and admitting that high inflation would remain for longer than previously expected.

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GBP/USD Technical Analysis

• GBP/USD has support at 1.3190 and 1.3116
• There is resistance at 1.3314 and 1.3364

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