GBP/USD rises after Bailey’s hawkish remarks

• BoE’s Bailey says markets underestimating inflation
• Federal Reserve to release minutes later today

The British pound continues to rally on Tuesday after recording back-to-back winning days. In the North American session, GBP/USD is trading at 1.2544, up 0.33%. Earlier, the pound touched a high of 1.2559, its highest level since September 6th.

Bailey sends markets hawkish message

Bank of England Governor Bailey testified before the Parliament’s Treasury Committee earlier today. Bailey had a clear message for the markets, warning that they were underestimating inflation and “putting too much weight” on the fact that headline inflation is in decline. Headline CPI dropped to 4.6% in October, down sharply from 6.7% in September. However, much of that slide is due to falling energy prices. The BoE is more concerned with core CPI and services prices which remain stubbornly high – core CPI dropped from 6.1% to 5.7% in October.

With the battle against inflation clearly not over, Bailey is pushing back hard against market speculation of a rate cut in mid-2024 and has said that cuts remain a long way off. The BoE is still concerned about inflation risks, such as the Israel-Hamas war and a possible spike in energy or food costs. The markets, which have priced in three rate cuts in 2024, are focused on the poor economic outlook and the risk of a recession, which should dampen any appetite in the BoE to raise interest rates.

The Federal Reserve releases the minutes of the November meeting later today. At the meeting, the Fed maintained rates at 5.25%-5.50% for a second straight time and the markets are confident that the Fed is done with tightening and will trim rates in mid-2024. However, the Fed is in no mood to talk rate cuts, with inflation still well above the 2% target. At the meeting, Powell sounded hawkish, saying that inflation was still too high and that the Fed was prepared to raise rates if necessary. The minutes will likely bear a  similar hawkish message and that could provide a boost to the US dollar.

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GBP/USD Technical

• GBP/USD is testing resistance at 1.2476. Above, there is resistance at 1.2575
• 1.2394 and 1.2312 are the next support levels

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