The current level of UK inflation is more than double the Bank of England’s target rate of 2% and with higher inflation expected over the next few months, the BoE has been forced to act to get ahead of the situation.
The UK Labour market is also robust with the employment rate rising to 75.5%, while the unemployment rate has fallen to 4.2%. In another sign that inflation may become a longer-term problem, from August to October 2021, annual growth in average total pay including bonuses rose to 4.9%. The tight conditions seen in the UK labour market over the last few months was expected to loosen when the UK furlough scheme ended in September, but this has not been the case and the jobs market remains very tight.
It is against this backdrop that the BoE decided to hike rates and with both inflations expected to remain high, and the labour market to remain tight, the UK central bank will have to hike rates again in the coming quarters. It is likely that the BoE will hike the base rate by 25 basis points at its February 2 meeting with further hikes possible in March or May and beyond. This backdrop will underpin Sterling against a range of currencies, especially the Euro and the Japanese Yen, as the interest rate differential between these low yielding currencies and Sterling widens. Sterling hit a multi-month low of 1.3160 against the US dollar recently and this is likely to be the low for some time with the US not expected to lift rates until mid-2022. With the Bank of England now firmly on a path of tightening monetary policy, Sterling-pairs have room to move higher over the next three months.
The Euro has moved lower against a surging US Dollar as expectations for aggressive hawkishness from the Fed continues despite some recent dovishness. President of the Federal Reserve Bank of Minneapolis, Neel Kashkari, appeared to be swimming against the rate hiking tide in comments he made overnight. Maintaining his dovish credentials, he stated that he thought that inflation would return to the low levels seen prior to the pandemic once the Covid shock had passed. It should be noted that he will be non-voting member of the FOMC in 2022.
GBP/USD has managed to stage a decisive rebound after dropping below 1.3500 on Tuesday and continued to stretch higher early Wednesday. According to analysts, the pair is closing in on a key technical resistance that could cap its potential gains.
US private sector employment report and FOMC’s minutes will be watched closely “In the second half of the day, the ADP Employment Change data for December will be featured in the US economic docket. Markets expect the employment in the private sector to increase by 400,000. A better-than-expected print could lift US T-bond yields higher while helping the greenback regather its strength and vice versa.” “Later in the session, the FOMC will release the minutes of its December policy meeting. The dollar should be able to outperform its rivals in case this publication reaffirms the Fed’s hawkish policy outlook.
FX Street Technical Analysis- 05th January 2022
GBP>EUR – 1.1978
GBP>USD – 1.3540
EUR>USD – 1.1304
GBP>CAD – 1.7211
GBP>AUD – 1.8683
GBP>SEK – 12.283
GBP>AED – 4.9719
GBP>HKD – 10.550
GBP>ZAR – 21.549
GBP>CHF – 1.2396
· USD ADP Employment Change(Dec)
· USD FOMC Minutes
· US ADP December Preview: Suddenly its inflation, not jobs
· EUR/USD Forecast: Euro unlikely to stage a convincing rebound ahead of US events
· GBP/USD struggles above 1.3500 amid Brexit stalemate, US events eyed
· BOJ to slightly revise up next fiscal year’s inflation forecast – Reuters
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