Only on Wednesday, the pound/dollar pair was trading near its yearly low near 1.3160. A record rise in the UK inflation discouraged investors. As a result, the uptrend stopped very fast. It seems that traders concluded that the regulator would take the wait-and-see approach and focus on weak GDP data. After the data publications that took place on Friday, some analysts doubted that the BoE would raise the key rate even in February. No one had expected that the regulator would take such a step in December.
However, a surge in inflation forced the Bank of England to hike the key interest rate by 15 basis points, thus causing a jump in the British pound. Eight of nine members of the committee voted for the tightening of monetary policy. Only Silvana Tenreyro opposed such measures. This is quite logical, given her previous rhetoric. Earlier, she stated that the key rate hike aimed at curbing the surging inflation might cause some problems. She believes that high inflation rate could be explained by temporary supply disruptions around the world.
However, this time, Silvana Tenreyro was the only representative of the dovish stance. All other members of the committee voted for higher interest rates. After disappointing data on the UK economic growth in October, which was published last Friday, the likelihood of the key interest rate hike was estimated at 35%. Analysts suppose that the regulator would once again ignore the inflation growth, especially amid the rapid spread of the new Omicron strain in the UK.
Experts thought that the committee members would only tighten their rhetoric, announcing its plan to raise the key rate only in February 2022, during the first meeting of the upcoming year. However, the Bank of England became the first large central bank in the world (except for the Reserve Bank of New Zealand) that decided to tighten its monetary policy after the coronavirus outbreak. Concerns about Omicron and GDP growth failed to stop the regulator from taking radical measures.
Most of the experts interviewed before the meeting said that the central bank might leave all the parameters of monetary policy unchanged. At the same time, they assumed that the number of those who voted for higher rates could increase to five.
However, the rapid inflation growth affected the situation. Notably, on a yearly basis, the UK CPI jumped to 5.1%. This is the largest increase since November 2011. Core CPI also jumped to 4.0%, reaching its 29-year high.
Given the restrained and dovish forecasts that prevailed on the market before the December meeting, there is no wonder that the pound/dollar pair soared by almost 150 pips. As a result, the Bank of England exceeded all expectations, provoking shock therapy.
The British regulator was ahead of the Fed by about 4-6 months (depending on which meeting the Fed will decide to raise the keyrate). Of course, this factor is definitely hawkish. However, over the past few weeks, the pound was getting cheaper against the background of the hawkish comments provided by representatives of the British regulator. The British pound was mainly affected by Brexit, the results of which did not allow buyers of GBP/USD to seize the initiative.
Some time later, a new virus strain appeared in the UK, thus affecting the price of the national currency. The incidence of this strain reaches the highest rates in the country since the beginning of the pandemic. Although specialists are still discussing how dangerous Omicron is compared to Delta, in the context of the foreign exchange market, this problem should be viewed from a different point of view. Traders are primarily concerned about the reaction of the authorities and the possible economic consequences of the new coronavirus wave. Thus, in early December, London reintroduced quarantine restrictions. In particular, the citizens of the country were obliged to resume the remote format of work. At the moment, the situation is getting worse again, so the British authorities may tighten the quarantine measures. In particular, according to the conclusions of the London School of Hygiene and Tropical Medicine, a powerful wave of infections may cover the country in January unless the government introduces stricter measures. At the same time, representatives of the World Health Organization said that accurate information about the severity of Omicron would be available in 2-3 weeks.
Thus, Brexit and Omicron may significantly affect decisions made by buyers of the pound/dollar pair. It means that a rise in the British currency could be short-lived. Notably, the pair failed to consolidate above the Tenkan-sen line located at 1.3340 on the four-hour chart. If the British pound fails to consolidate above 1.3300, the trend will hardly reverse.
That is why traders should choose the wait-and-see approach. The fact is that the price may start moving in either direction.