The pound is not too exposed to market volatility, but the debate of central banks related to the completion of stimulus programs and the potential rise of the key rate did not pass by it. The British currency drew the appropriate conclusions and tried to benefit from the situation.
The current rise in the pound was facilitated by the comments of Ben Broadbent, deputy head of the Bank of England, about the "limited labor market" in the UK. According to the official, this contributes to an increase in inflation and increases the likelihood of an early rise in interest rates. The latter issue is acute for most central banks, including the Bank of England. Earlier, Fed chairman Jerome Powell emphasized the "temporary nature" of inflation and refused to take drastic measures when changing the monetary policy. Against this background, B. Broadbent asks the question: what is hidden behind the concept of "temporary"? He seeks to clarify what period of time he is talking about. According to the conclusions of the deputy head of the Bank of England, a period of 18-24 months is suitable for the definition of temporary, from which one should proceed when calculating the inflation rate.
Moreover, BoE's deputy head that UK inflation will continue to grow in the next few months. According to the regulator's November forecasts, inflation will remain above the target level of 2% over the next 2-3 years without rate hikes. Its source is the active growth in demand for labor in the UK. In order to achieve the inflation target in the next two years, the deputy head of the Bank of England suggests returning to the question of the number of interest rates at each meeting. It is worth noting that the next meeting of the regulator is scheduled for next Thursday, December 16.
One of the pressing issues at the Bank of England's upcoming meeting is the impact of the new strain of coronavirus "Omicron" on the country's economy. The regulator needs to assess the current situation and predict the further impact of a new viral mutation. The central bank is waiting for data on the new strain in order to act according to the information received and finally resolve the issue of a potential rate hike. It should be noted that the current market low estimates the chances of an increase in the rate, while not excluding its increase by 15 bps, up to 0.25%.
In this situation, the pound remains relatively stable. It can be recalled that it rose on Monday on the comments of B. Broadbent and continues to grow. Yesterday, the GBP/USD pair tested a new daily high around the level of 1.3285 and recovered a major share of losses. On Tuesday morning, the GBP/USD pair was trading at the level of 1.3288, trying to consolidate in the upward trend.
According to analysts, the pair attracted buyers of the pound, due to which the GBP/USD pair managed to break out of the low range near the level of 1.3200. As a result, the pound made a "bearish" breakout from the short-term descending channel. However, experts warn of a possible slowdown in the upward movement, which will face stiff resistance near 1.3300. If the GBP/USD pair continues to recover and reaches the range of 1.3340-1.3350, the next step will be the level of 1.3400.
However, the pound's progress to new highs slows down the confrontation between the UK and the European Union amid the economic problems that have arisen after Brexit. In the current situation, investors are afraid to open long positions on GBP. Uncertainty about the Bank of England's key rate hike affects the general instability. According to preliminary estimates, most members of the regulator will keep the rate at a historic low of 0.1%. This can shake the position of the pound, but experts are sure that the positive factors will outweigh it.