Pound steady as CPI within expectations

The British pound continues to rally, with only one losing session out of the past five sessions. GBP/USD has edged higher on Wednesday and is currently trading at 1.3820, up 0.19% on the day. UK inflation for September was within expectations, as CPI came in at 3.1% and Core CPI at 2.9% and the pound’s reaction was muted.

Will November bring a Fed taper and BoE hike?

The BoE has mounted a full-court press in favor of a rate hike and the markets have come on board, pricing in a 90% likelihood that the BoE will hike rates by 0.25% at the next policy meeting on November 4th. BoE Governor Andrew Bailey said on the weekend that the bank will have to take action against inflation. Bailey reiterated that inflation was temporary but acknowledged that the recent rise in energy prices meant that the rise in inflation would be larger and last longer than the bank had anticipated.

Still, there are some MPC members who fear that the BoE is moving too quickly to tighten monetary policy. MPC member Silvana Tenreyro said last week that a rate hike would be “self-defeating” since it was unclear how long the rise in inflation would last. Other MPC members have noted that a rate hike could stifle the recovery and become a policy mistake if the central bank is forced to make a U-turn on rates in a few months from now.

A Federal Reserve tapering appears likely in November, which would mean a scaling back of the USD 120 billion in monthly bond purchases. The programme was introduced to ease curb the fallout of Covid pandemic, and Powell & Co. are of the view that the economy can be slowly weaned off this support, with bond purchases expected to wind up around July 2o22.

Once tapering is finally underway, the next item on the Fed’s plate will be rate policy. Policy makers are having to deal with persistently high inflation along with a likely slowdown in growth, which makes the timing of a rate hike a tricky task. A rate hike is a useful tool to contain inflation, but it could also chill the employment market and decrease job gains. The Fed is expected to raise rates in the second half of 2022 or perhaps in 2023.

GBP/USD Technical Analysis

• The pair is pressing on resistance at 1.3822. This is followed by the round number of 1.3900
• There is support at 1.3618. Below, there is support at 1.3492

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