December 14, 2021 8:23:37

With the emergence of Omicron and more restrictions, markets are dialling back their bets on the Bank of England raising rates this Thursday. There is now less than a one-in-three chance of a 15bp move, compared to around 75% late last month before the new variant emerged. The outlook for the economy has been muddied by “Plan B” and major uncertainty in the near future. There is no press conference or new forecasts at the BoE meeting so the tone of the statement will be a key focus.

Recently, the bank’s top hawk, Saunders, said he would prefer to wait for more evidence on the Omicron front before altering policy. This will probably be the line for the MPC as a whole. But the data since November’s surprise pause decision has been largely solid with this morning’s wage growth and employment figures adding to this theme. Inflation has come in higher and could peak above 5% in April.

A hawkish Fed and a BoE hold could see more near-term weakness in cable amid rising political risks. If the MPC votes unanimously to leave rates on hold, markets could potentially reprice a February rate hike. Much will depend on Omicron and whether the BoE look through this risk and signal a rate rise is in the offing. Of course, the FOMC meeting tomorrow will shape price action initally!

GBP/USD downtrend slows

The bearish trend in GBP/USD since June that accelerated in late October continues. Support was seen around the September low at 1.3411, but prices have moved down over the past few weeks.

The 38.2% Fib level retracement from 2020 at 1.3165 has capped the downside so far and a base may be building around 1.32. Downside momentum in the MACD has slowed. The 200-week SMA at 1.3149 offers support below here. But the major will need to get above 1.3411 to stop the longer-term bearish momentum.