Pound dips after mini-rally

The British pound is in negative territory in the Friday session. GBP/USD is currently trading at 1.3682, down 0.27% on the day.

BoE stays pat, but pound jumps

The BoE held the course on monetary policy, leaving its key interest rate at 0.10% and its asset purchase target at GBP 875 billion. At the same time, two MPC members voted for an early end to the Bank’s bond purchases, up from one member at the previous meeting, as the case for tightening has gathered a bit more momentum. The Bank downgraded growth forecasts while warning that inflation would rise above the 4% level by the end of the year, double the Bank’s inflation target.

The BoE’s stance can be summed up as a “wait and see mode”, as policymakers try and make sense out of an economic picture that shows growth slowing and inflation heading higher. However, many investors are convinced that the central bank may hike rates as early as February of 2022 if inflation does not ease. This sentiment buoyed the British pound on Thursday, with gains of 0.76%.

For its part, the Bank continues to insist that inflation is transient, but this view is becoming a hard sell as inflation continues to head higher – CPI jumped 3.2% in August (YoY), up sharply from 2.0% in August. The September CPI reading will be closely watched, as the BoE will be under further pressure to tighten policy if inflation shows no signs of cooling off.

With Fed Chair Jerome Powell strongly hinting that the Fed is preparing to press the taper trigger by the end of the year, the markets will look ahead to the timing of a rate hike. The Fed has stressed that there is no link between tapering and a rate hike, but with the Fed finally acknowledging that it will tighten policy, discussions about the timing of a rate hike are sure to intensify. FOMC members are split on whether a rate hike will take place in 2022 or 2023, and the economy’s performance will be a key factor as the timing of a rate increase.

GBP/USD technical analysis

• There are resistance lines at 1.3851 and 1.3975.

• 1.3666 is a weak support line. Below, there is support at 1.3605.