GBP/USD – BoE continues to push back against market expectations, Fed minutes

• BoE policymakers hawkish in Monetary Policy Report hearing
• FOMC minutes likely to reinforce higher for longer narrative
• GBPUSD facing big test at 1.26

The Bank of England used its monetary policy report hearing to once more push back against market expectations on rate cuts next year.

A lot of the comments echoed similar sentiments expressed recently by the central bank regarding the job not being done, risks being to the upside for various reasons, and the need to leave rates for an extended period. However, some policymakers went one further, suggesting rates may need to rise further.

Time will tell how realistic the prospect of another rate hike is, considering inflation recently fell even faster than the BoE forecasts anticipated, but it’s clear that markets pricing it at near zero with a cut in the second quarter has irked some on the committee.

Not that today’s comments have changed much, with markets pricing only a 6% chance of another hike this cycle and roughly a 55% chance of a cut by June. It hasn’t been the best year though for market interest rate expectations and there’s every chance they’re too hopeful once more.

Familiar message likely from the FOMC minutes

It will be interesting to see whether we get a similar level of pushback from the FOMC minutes later in the day.

While these comments are somewhat dated at this point and the data since has looked more promising, sentiment on the committee going into year-end is important, with the central bank’s reputation somewhat bruised by its inaction at the start of this tightening process.

Policymakers desperately don’t want to underestimate the threat of inflation again now, just as pressures appear to be easing. I expect the minutes will simply re-emphasize the need to stay higher for longer, with perhaps slightly less talk of further rate hikes.

Approaching major resistance point

The pound has continued to rally against the dollar but it is nearing a point that could be a big test for the pair.

GBPUSD Daily

Source – OANDA on Trading View

That is around 1.26 which represents the 50% retracement of the July highs to October lows but there’s more to it. It was also the neckline of the head and shoulder formation that the pair broke below at the start of September, which could make it an interesting test too on the way back up.

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