Pound jumps as BoE hints at 50-bp hike

The British pound has posted sharp gains on Thursday. In the North American session, GBP/USD is trading at 1.2153, up 0.68%.

BoE points to further rate hikes

BoE Governor Andrew Bailey was in the spotlight today as he testified about last week’s Monetary Policy report before a parliamentary committee. The pound fell following last week’s rate meeting after Bailey said that he expected inflation to fall rapidly this year. Bailey may have backtracked in today’s testimony, saying that he needed more evidence to be sure that inflation has “turned a corner”.

BoE member Haskel was hawkish in his testimony as he said that “inflation is more persistent than we expected” and the Bank would “act forcefully if necessary”. The use of the term “forcefully” was significant, as the Bank omitted that term in the February monetary statement, which the markets took as a dovish signal. Haskel’s use of the term could be a hint that another 50-bp hike is coming in March, and the pound has responded with sharp gains.

The pound could hit some turbulence on Friday, as the markets brace for some weak releases. GDP for the fourth quarter is expected to fall to just 0.4% y/y, compared to 1.9% y/y in Q3. Manufacturing Production is projected to slide by 6.1% in December, after a -5.9% reading in November.

The Fed continues to preach a hawkish message to the markets. On Wednesday, four Fed members said that inflation was moving lower but there was still much work to do, with New York Fed President Williams saying that a restrictive policy stance could last for a few years until inflation dropped to the target of 2%. The markets may be listening more closely to the Fed since the blowout employment report on Friday, but continue to underestimate the Fed’s end game. The markets have priced in a terminal rate of 4.6%, while the Fed has projected a terminal rate of 5.1%.

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GBP/USD Technical

• GBP/USD tested resistance at 1.2173 earlier today. The next resistance line is 1.2297
• 1.2035 and 1.1928 are providing support

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