The British pound has stabilized on Tuesday, after sustaining losses over the past two days. GBP/USD is currently trading at 1.3381, down 0.11% on the day.
PMIs point to inflation
UK PMIs for October were positive, as manufacturing and business activity continue to show expansion. Manufacturing PMI rose to 58.2 in November, up from 57.8 in October. The Services Business Activity PMI dropped to 58.6, down from 59.1 and a 2-month low. Businesses are reporting increasing cost inflation, a result of higher wages and increased costs for fuel and raw materials. As well, manufacturers continue to be hampered by global supply chain disruptions, which has hurt manufacturing sales. The increase in costs will eventually make their way to consumers, which means that consumer inflation will likely move even higher.
Listening to BoE officials, it’s still unclear whether the BoE will raise rates at next month’s policy meeting. 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. On the weekend, however, Governor Bailey spoke about the inflation picture being “two-sided”, saying that inflation could remain “elevated for longer”, but it was also possible that inflation would ease.
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.
The financial markets are relieved with the renomination of Jerome Powell, which provides stability and consistency at the Fed at a delicate time for the central bank. Powell is under pressure to accelerate its timeline of raising interest rates, and there is a growing expectation that the Fed will raise rates in June 2022, after the central bank winds up the bond purchase program. The Fed will have to proceed carefully with regard to tightening policy, balancing the need to contain inflation without choking the economy, which still has not emerged from the Covid pandemic.
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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