The British pound is actively strengthening against the dollar. Today, the GBP/USD pair reached a 2.5-month price high, stabilizing near 1.25. Interestingly, this price dynamic is driven not only by the weakening greenback but also by the simultaneous strengthening of the British currency. Today's statements from the Bank of England officials, including Governor Andrew Bailey, have brought back the issue of further tightening of monetary policy in the foreseeable future. Meanwhile, the dollar remains under pressure amidst a decline in hawkish expectations and growing interest in risk assets. This combination of fundamental factors allowed GBP/USD buyers to test the 1.2550 resistance level, which corresponds to the upper line of the Bollinger Bands indicator on the D1 timeframe.
Last week, the pound plunged after the release of UK inflation data. The release fell into the red zone, indicating a slowdown in inflation. For instance, the overall Consumer Price Index (CPI) dropped sharply to zero on a monthly basis. On a yearly basis, the index also fell below the forecasted level, at 4.6% (forecast was 4.8%), the weakest growth rate since October 2021. The core CPI in October decreased to 5.7% - the weakest growth rate since March 2022. The Retail Price Index, used by British employers in wage negotiations, also slowed (-0.2% m/m against a forecasted rise to 0.1% m/m and 6.1% y/y, against a forecasted rise to 6.3%).
On one hand, inflation in Britain remains at a relatively high level. On the other hand, key inflation indicators are declining rapidly. Immediately after the publication of inflation data, the market concluded that the October figures put an end to the debate on tightening monetary policy prospects. Moreover, there was talk in the market that the Central Bank might lower the rate in the first half of next year. However, judging by today's statements from the Bank of England representatives, the regulator has maintained a combative stance and readiness for further tightening of monetary policy.
Today, the Bank of England released a report on its monetary policy, drawing comments from several of its representatives – Catherine Mann, Dave Ramsden, Jonathan Haskel, and Governor Andrew Bailey. Their hawkish statements lent support to the British currency, which was surprising considering the downward trend in key inflation indicators.
Jonathan Haskel, in particular, commented that the decline in the overall Consumer Price Index should not be seen as a reliable guide for determining inflation trends. He expressed concern that inflation remains too high. His colleague, Catherine Mann, conveyed a more straightforward message, noting recent signs of persistent inflation and emphasizing the necessity for further policy tightening. According to her, it's crucial for the regulator to focus on achieving the two percent target, making further tightening of monetary policy significant at this time.
Deputy Governor Dave Ramsden joined what can be termed the 'hawkish chorus', suggesting that the regulator might need to raise interest rates again. He indicated that recent surveys of households and businesses show stable inflation expectations and hinted at a sustained high rate level, meaning that the restrictive policy will be justified over a prolonged period.
Governor Bailey added to the overall picture, albeit with more nuanced and less hawkish remarks. He likened the current situation to being on a tabletop mountain, implying that rates might be at their peak, but it is too early to talk about a reduction. His comments were somewhat contradictory; while he praised the latest inflation report as mostly in line with expectations, he also noted increasing risks, including an inefficient labor market as a potential inflation driver.
Today's statements from the Bank of England representatives provided additional support to GBP/USD buyers, leading the pair to a two-month price high. On one hand, dollar pair traders are almost certain that the Federal Reserve has concluded its current cycle of monetary policy tightening, with dovish market sentiments gradually growing. On the other hand, the Bank of England maintains a combative stance, hinting at another rate hike in one of the upcoming meetings.
This fundamental backdrop favors further growth of GBP/USD.
From a technical standpoint, the pair on the daily chart is above all lines of the Ichimoku indicator (including above the Kumo cloud) and is testing the upper line of the Bollinger Bands (1.2550). Breaching this level would open the way for buyers to the next price barrier, 1.2610 (the Kijun-sen line on the same timeframe).