FX.co ★ Bank of England admits responsibility for record high inflation

The pound sterling is now hitting new weekly highs thanks to the best efforts of traders. In the meantime, Huw Pill, Chief Economist at the Bank of England, admitted that continuing monetary stimulus during the pandemic was a mistake and that money-printing has contributed to skyrocketing inflation. Earlier, policymakers put the blame for high inflation exclusively on high energy prices and Russia.

When answering questions from lawmakers in the House of Lords, Pill said the decisions taken might have been different with the benefit of hindsight. Inflation is 10.1%, five times the BOE's target rate, and it could rise even further, demanding swift action from the UK central bank. As noted above, this is the first time a current member of the Monetary Policy Committee has admitted the central bank may have contributed to the cost-of-living crisis. The Bank of England's £450 billion of quantitative easing has increased the money supply significantly, fueling record-high inflation.

Currently, the UK regulator owns more than half of securities it bought during the pandemic to support the economy. The BOE has not yet provided any information on the balance sheet reduction and its timeline.

Huw Pill also noted he was not at the bank in 2020 when the decisions were taken and added that whether policymakers would have made those choices knowing what they do now "is an open question." "The destruction of demand was over-emphasized relative to the destruction of supply, and that probably meant support for demand was stronger than it should have been," Pill said.

The Bank of England is now trying everything to prevent damage from that stimulus by raising interest rates at the strongest pace in 33 years. The BOE has increased its benchmark lending rate eight times to 3%, its highest level in 14 years.

According to Huw Pill, the ongoing signs of labor market tightness are one of the main reasons for higher interest rates. The unemployment rate is at its lowest level in 40 years. Since the beginning of the pandemic, 600,000 workers have dropped out of the workforce and applied for benefits. This has caused recruitment problems for employers and pushed up wage growth, boosting inflation in the process. Pill noted that there is a risk of inflation becoming embedded in wages, which will cause more persistent inflation.

On the technical side, GBP/USD continues to advance, recovering losses it sustained last week. Now, bulls are focused on defending the support level of 1.1510 and breaking through the resistance at 1.1590. A breakout above this level would be required for advancing towards 1.1690. From there, the pound sterling could surge towards 1.1730 and 1.1780. If bearish traders push the pair below 1.1510, it would make a possible short term uptrend highly unlikely. A breakout below 1.1510 would send the pair back to 1.1430 and 1.1360.

EUR/USD bears are waiting for Thursday's release of US inflation data and are not particularly active at the moment. An uptrend would require the pair to break above 1.0090, which would send the pair towards 1.0140. EUR/USD has regained the parity level, but now it needs to settle above it at least until the release of US inflation data due to a strong market reaction to the US midterm elections. If the pair fails to hold on the support level of 1.0030, it would fall back to 0.9970. From there, it could decline to the low at 0.9920 under increased pressure. If EUR/USD breaks below 0.9920, it could hit the lows at 0.9880 and 0.9830.