- The British pound got a good boost on Monday after the Bank of England signaled an imminent rate hike.
- The rally remains limited amid the underlying bullish sentiment surrounding the dollar.
- The Fed’s downsizing expectations, the cautious market mood acted as a tailwind for the safe-haven dollar.
The pair GBP/USD it trimmed a significant portion of its intraday gains and was last seen trading in the 1.3625-30 zone, gaining 0.10% on the day.
Bank of England officials signaled an imminent rise in interest rates over the weekend and provided a good intraday boost to the British pound on the first day of a new trading week. Bank of England Governor Andrew Bailey has warned of a potentially very damaging period of inflation unless lawmakers take action. On top of this, Michael Saunders, one of the more aggressive members of the Bank of England’s Monetary Policy Committee, suggested that investors were right to advance bets on rate hikes.
GBP / USD rose to nearly two-week highs, around the 1.3670-75 zone, though it struggled to capitalize on the move amid a modest pickup in demand for the US dollar. Friday’s disappointing NFP figures for September were offset by a large upward revision from the previous month’s reading and reaffirmed expectations that the Fed will soon begin to reduce its asset purchases. Markets also appear to have raised the stakes of an interest rate hike by the Fed in 2022.
Concerns that the recent surge in crude oil and energy prices will fuel inflation has been fueling speculation about an early Fed policy tightening. The combination of factors pushed the yield on the US government bond to 10 years to a four-month high, past the 1.60% threshold on Friday. This, in turn, continued to act as a tailwind for the dollar and kept any strong follow-up positive movement for the GBP / USD limited, at least for the time being.
Meanwhile, fears of a return to stagflation (high inflation and low growth) dampened investors’ appetite for perceived riskier assets. This was evident by a softer tone in equity markets, which was seen as another factor that benefited the dollar’s relative safe-haven status. Therefore, it will be prudent to wait for a strong follow-up sell before placing new bullish bets around the GBP / USD pair and positioning yourself for any further appreciation movements.
There is no major UK economic data to move the market, while the US money markets will remain closed in observance of Columbus Day. This kept investors on the sidelines and helped limit GBP / USD gains, rather prompting some selling at higher levels. Market participants are now looking forward to the UK monthly employment details, scheduled to be released on Tuesday for some significant business opportunities.
Technical levels to follow
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