GBP/USD bulls stay on top in the 1.36 areas, eyes on the Fed, BoE and UK politics

• GBP/USD holds in bullish territory as the US dollar and yields pullback. 
• UK politics, the BoE and the Fed are the main focus. 

GBP/USD is trading at 1.3627 and higher by some 0.24% after rising from a low of 1.3585 to a high of 1.3648. Besides domestic drivers, the pound has benefitted from a pullback in US yields and the greenback. US Treasury yields are retreating from near two-year highs on 2-year and 10-year notes.

The focus this week, in the absence of many data drivers, has been the surge in US yields and a recovery in the UIS dollar. Investors are prepared for a widely expected interest rate increase in March. Sterling, meanwhile, edged higher after UK data on Wednesday showed British inflation rose 5.4% in December, to its highest level in 30 years.

The Bank of England is a major focus in this regard and it had expected CPI inflation to be 4.5% in December, so today’s print represents another material upside miss relative to the central bank’s view, analysts at Nomura explained.

''While that’s not enough by itself to dictate further interest rate increases (after all, the BoE is focused on keeping inflation at target over the medium term and can do little about the current ‘baked-in-the-cake’ elevated inflation rates), we continue to see rates rising throughout 2022 to a terminal rate of 1.50% by H2 2023 as the Bank attempts to dampen the impact of rising current inflation on second-round effects – namely inflation expectations and crucially wages. We continue to see the next hike of 25bp on 3 February.''

The Bank of England governor, Andrew Bailey, confirmed the central bank's view on the economy at the Treasury Select Committee, although he stressed that his comments today were not intended to indicate a view on interest rates. He did say that the labour market was tight and he said the BoE is seeing some evidence of second-round inflation effects. 

''For God's sake, go!''

Elsewhere, UK politics is keeping traders on their toes with an ear to the ground surrounding the ''Partygate'' scandal. Talks of a leadership challenge to Prime Minister Boris Johnson is likely keeping the pound hamstrung. Conservative MP David Davis, from the same party as Prime Minister Boris Johnson, called on the British leader to step down from office as Johnson faces a torrent of criticism from lawmakers and citizens over his alleged participation in a party held at 10 Downing Street in breach of Covid-19 rules. ''In the name of God, go,'' MP David Davis exclaimed.

Johnson, in response, evaded the issue in Parliament today and has requested everyone waits for the results of the investigation into the scandal. If he has misled Parliament, he will have to resign if he is not toppled by his own MPs in a no-confidence vote. However, the markets are not seeing an obvious alternative that may go in Johnson's favour and see him through a no-confidence vote. 

In additional politics, in what is positive for UK business, confidence and the outlook for growth, Boris Johnson announced the easing of Covid Plan B measures today. 

Current measures in England, including guidance to work from home and the widespread use of face coverings, were brought in to halt the spread of Omicron last month and will be reviewed again on January 26. he said the pandemic is not over and Omricon is not a mild disease, especially if you are not vaccinated or boosted.

Focus turns to the Fed

Across the pond, markets are getting set for next week's Fed that will meet. Traders and investors will be looking for further clarity and details on the end of quantitative easing, which will likely be in March. The US central bank could also signal it will raise interest rates in March as well right after ending QE. Fed funds futures have fully priced in a rate hike in March and four in all for 2022.