British pound eyes Bailey testimony

The British pound is slightly higher on Wednesday. In the North American session, GBP/USD is trading at 1.2725, up 0.12%.

BoE’s Bailey testifying before Treasury Select Committee

Bank of England Governor Bailey is testifying before the Treasury Select Committee today. His testimony follows the release of the Financial Stability Report and lawmakers want Bailey’s assurances that high interest rates will not affect financial stability. Investors will be searching for clues from Bailey about the BoE’s future rate policy.

Bailey has told lawmakers that the BoE is committed to bringing inflation back down to the 2% target. He noted that unemployment has not risen while household incomes are higher, and said that these factors had helped ease the impact of higher interest rates.

What can we expect from the BoE over the next several months? The central bank has maintained the cash rate at 5.25% for three months and is unlikely to raise rates further provided that inflation continues to decline. The markets have priced in rate cuts during the year but Bailey has not even hinted at lowering rates, and he seems content to keep rates in restrictive territory until inflation falls closer to the 2% target – in other words, let high rates continue to do the job of cooling down the economy and pushing inflation lower.

The US dollar has been surprisingly strong early in the New Year, despite the Fed pivoting sharply and signalling that it plans to lower rates this year. The greenback was hammered by the pound over November and December but has held its own in January. Last week’s nonfarm payroll report was stronger than expected, providing support for the Fed to maintain rates in restrictive territory until inflation falls closer to the 2% target.

This stance was reiterated by Atlanta Fed President Bostic on Monday, who said he has a “natural bias to be tighter” and that he anticipated two rate cuts by the end of the year, with an initial one in the third quarter. This is a far cry from market expectations of up to six rate cuts this year, starting in March.

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GBP/USD Technical

• GBP/USD is testing resistance at 1.2722. Above, there is resistance at 1.2753
• There is support at 1.2678 and 1.2647

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