Pound drifting, job data looms

The British pound had an uneventful week, and the lack of activity has continued on Monday. In the European session, GBP/USD is trading close to 1.3250.

It is a busy week on the economic calendar and this should translate into volatility for the British pound. The UK releases employment data on Tuesday, followed by inflation numbers on Wednesday. The markets are expecting solid unemployment claims to fall and for inflation to rise to around 4.5%. However, even if these forecasts materialize, the Bank of England is unlikely to raise interest rates at its policy meeting on Thursday.

The BoE is in an unenviable position, as an improving labor market and high inflation are supportive of a rate hike. The Fed has given up on labeling inflation as “transitive”, and one would assume that the BoE agrees that such is the case with UK inflation, even if they haven’t come out and admitted it. Still, the potential impact of the Omicron variant remains the elephant in the room and there is about a 60% likelihood that the BoE will stay pat and maintain the 0.10% cash rate. If the bank does press the rate trigger, it would likely raise the cash rate by 15 bps, to 0.25%.

Preliminary data shows that Omicron appears to spread 4.2 faster than the Delta strain but does not appear to cause severe symptoms among vaccinated people. That’s not to say that the situation isn’t serious – Omicron has been doubling every few days in the UK and is projected to become the main variant in the UK by next week.

This week’s highlight is the FOMC policy meeting on Wednesday. With the November inflation report showing that prices rose 6.8% y/y, the highest in 40 years, the Fed is even more likely to announce that it will double the pace of its taper, to US 30 billion/month. This means we can expect a rate hike in mid-2022, if not earlier. Investors will be paying close attention to the meeting’s dot plot, which should show that more policymakers are on board for a rate hike in 2022.

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GBP/USD Technical Analysis

• GBP/USD has support at 1.3161 and 1.3091
• There is resistance at 1.3336 and 1.3441

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