Bailey signals rate hike coming

The British pound is trading quietly on Tuesday. GBP/USD is currently trading at 1.3569, up 0.06% on the day.

Bailey says BoE monitoring inflation

The BoE surprised the markets last week when it stayed on the sidelines at its policy meeting and kept its benchmark rate at 0.1%. BoE Governor Andrew Bailey had stated that before the meeting the bank would act to contain rising inflation, and many investors viewed Bailey’s comments as a hint that the bank would raise rates at last week’s policy meeting. When the BoE failed to carry through with a rate hike, the markets were stunned and the pound fell sharply.

Bailey may have felt the need to do some damage control after last week’s non-move and held a Q&A with the public on Monday. The Governor noted that there was a risk of further bottlenecks in the economy and said that the bank was on the path to raising rates, without providing any timelines.

The BoE could be faced with a credibility issue if it chooses to sit on the sidelines at the December meeting. The fact that the BoE is still running a QE scheme while talking about raising rates is also a potential source of confusion for the markets, as the two programmes are inconsistent with each other. In contradistinction, the Fed has no plans to raise rates before it winds up its bond purchase program.

Brexit is back in the news. More specifically, the UK has demanded changes to the trade rules affecting the movement of goods between Northern Ireland and the rest of the UK. Prime Minister Johnson has threatened to suspend the Protocol if no agreement is reached with Brussels. A unilateral move by Johnson would certainly trigger retaliation from the EU and could send the pound to lower ground.

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GBP/USD Technical Analysis

• GBP/USD continues to break support levels as it falls lower. The pair is testing support at 1.3471. Below, there is monthly support at 1.3253
• There is resistance at 1.3653 and 1.3813

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