British pound dips as dollar rally continues

The British pound is down for a second straight day. GBP/USD is currently trading at 1.3406, down 0.27% on the day.

Bailey mulls rate hike

The Bank of England took plenty of flak when it opted to stay on the sidelines and maintain interest rates at the November meeting. Governor Bailey was heavily criticised, as he had given the markets the impression that the bank would act against surging inflation. Will the BoE respond by raising rates at the December meeting? The markets have priced in a rate hike, with the most likely scenario being a modest rise from 0.10% to 0.25%.

On Friday, the BoE’s chief economist, Huw Phill, said that the ‘burden of proof’ was on policymakers to explain why not to raise rates. However, Governor Bailey made comments on the weekend which indicate that he is undecided (or is giving the appearance of being undecided) about a rate hike. Bailey said that although inflation is at high levels, the economy is slowing.

Another factor to keep in mind is the labor market, as last week’s numbers were strong, which would support a rate hike. The next employment report comes out just two days before the rate decision, and another positive release could sway those MPC members who are on the fence with regard to rates and result in a majority voting for a rate hike.

In the US, President Joe Biden chose Jerome Powell to head the Federal Reserve for another four years. Powell beat out Lael Brainard, who will become Fed vice-chair. Investors should be pleased with the decision, as it keeps consistency at the Fed at a delicate time, with inflation at a 30-year high and the economy still grappling with the Covid pandemic. Powell is considered slightly more hawkish than Brainard, and he could well opt to accelerate the tapering scheme due to inflation pressures.

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GBP/USD Technical Analysis

• GBP/USD tested support at 1.3390 in the European session. Below, there is support at 1.3336
• There is resistance at 1.3506 and 1.3568

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