Sterling jumps after CPI jumps above 5%

The British pound is up 0.42% on the day, as GBP/USD trades around the 1.3280 line.

UK inflation overperforms

UK inflation for November climbed 5.1% y/y, up sharply from 4.2% a month earlier and ahead of the consensus of 4.7%. Inflation continues to accelerate at a brisk pace, and the release marked the highest level since 2011. Core CPI rose to 4.0%, above the consensus of 3.7% and higher than the October reading of 3.4%.

With inflation well above the BoE’s target rate and showing no signs of easing, in ordinary times a rate hike would be almost a given. However, these are no ordinary times. The surge in inflation is a result of supply bottlenecks and post-lockdown spending, and not due to a strong economy that needs to be reigned in. The Covid pandemic continues to rage, with the new Omicron variant spreading much fast than previous strands of Covid.

The BoE lost some credibility when it signalled a rate hike was coming in November, only to stay on the sidelines. The markets were not pleased, and the pound took a tumble as a result. This time around, the markets have been warier and with the uncertainties surrounding Omicron, the likelihood is that the BoE will not make a move today. The markets have priced in a modest hike of 0.15% at the next policy meeting in February.

Anticipation is high ahead of the FOMC meeting later today. The Fed is widely expected to announce a normalization of monetary policy, as it sets the stage for a rate hike sometime in 2022. First things first – the Fed needs to wind up its bond purchase programme before raising rates. Policymakers are expected to double the tapering pace, from USD 15 billion/mth to USD 30 billion/mth. The dot plot is likely to show that the Fed plans to raise rates two or three times in 2022, followed by three or four times in 2023. This hawkish pivot should support gains by the US dollar.

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GBP/USD Technical Analysis

• GBP/USD has support at 1.3190 and 1.3116
• There is resistance at 1.3314 and 1.3364

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