GBP/USD slips as US debt ceiling crisis eases

• BoE Governor Bailey warns of wage-price spiral, testifies before Treasury Committee
• Markets lower odds of a Fed pause in June

BoE Bailey says UK in wage-price spiral

On Wednesday, Bailey had a hawkish message for the markets, saying that he would tighten policy if there was evidence that inflation pressures remained persistent. Bailey warned that the UK was in the midst of a wage-price spiral. This is another signal from the BoE that the fight against inflation will be protracted. Inflation is running at a 10.1% clip, despite aggressive tightening by the central bank. The BoE remains optimistic that inflation will fall more rapidly, but the 2% inflation target is likely years away.  Bailey will have his work cut out as he attempts to convince lawmakers to patiently wait for the tightening to percolate through the economy and dampen inflation. Bailey will be grilled by lawmakers during his testimony to the Treasury Committee today.

The US dollar is showing gains today against the major currencies, including the British pound, as progress has been reported in debt ceiling talks between Republicans and Democrats. The debt ceiling crisis has investors worried, but we’ve been down this road before, and given that the US has never defaulted on its debt, it’s extremely likely that a solution will be hammered out at the eleventh hour, with a deadline of June 1st.

The markets had widely expected a pause at the June meeting just a few weeks ago, but a hawkish Fed and a relatively strong economy have the markets more open to a hike. According to CME’s FedWatch, the probability of a pause is 67% and a 25-bp hike is 33%. Fed Chair Powell and other members have insisted that rate cuts are off the table, but the markets disagree, with the odds of a rate decrease at 66% in November and 89% in December.

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GBP/USD Technical

• GBP/USD is testing support at 1.2475. The next support line is 1.2366
• 1.2604 and 1.2676 are the next resistance levels

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