October 18, 2021 13:23:26
The market has been ramping up rate hike odds by the Bank of England after more hawkish remarks from Governor Bailey over the weekend. Swaps are fully pricing in a 15bp rise to 0.25% at its next (super)meeting on November 3, with the chance of more tightening to follow before the end of the year. Money markets are betting rates hit 1% by the summer of next year with nearly 115bps priced for the coming year.
This means interest rates will rise faster than at any point in the post-crisis years. It also implies that inflation is more of a problem in the UK than across the pond in the US. Remember that tapering by the BoE began in May and is set to end in December. The release of the September CPI on Wednesday will be key. Consensus forecasts another 3.2% print, but price pressures are set to persist well into next year, jumping close to 4% as the energy price cap is adjusted.
We note that Governor Bailey did warn that monetary policy cannot solve supply side problems. He believes higher inflation will prove temporary due to the nature of the underlying causes. Other MPC members, Mann and Tenreyro also suggested last week that there was little rush to lift rates. Indeed, many are questioning the broader health of the UK economy with potential Brexit issues and fiscal headwinds only adding to this more cautious stance.
GBP/USD trendline resistance may cap upside
With rates markets potentially overpricing BoE tightening, GBP/USD is also coming up to the down trendline from the June top at 1.3808. The 200-day SMA is not far above here at 1.3844. Data out this week will be a key near-term price driver for direction. Any close above here will see bulls aim for September highs above 1.39.
Cable initially broke out from early October consolidation above 1.3602 support. Friday’s move higher also took out the 50-day SMA at 1.3715. We have held above here so far today with support next seen at 1.3690. A break below will ease the immediate upside bias for a fall back to the 1.36 zone ahead of 1.3571.
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