Bailey Strikes Back
It was to be the final big week before the end of the year holiday period, with the Fed the BOE and the ECB each meeting. As it transpired, the Bank of England stole the limelight in the end with a surprise policy announcement which caught markets off-guard. The BOE opted to raise rates by 0.15% in the UK, taking the headline cash rate up to 0.25%. While the rationale behind the decision was clear (so, no surprise in that sense), the uncertainty around omicron, particularly given the return of work from home guidance, led many to believe the BOE would choose to wait it out until February before acting.
Urgent Action Against Inflation
With the latest inflation data showing that CPI soared once again last month, hitting more than twice the bank’s 2% target at over 5%, the need for the BOE to tackle inflation was clear. Along with inflation at decade highs, the labour market has continued strengthen. Despite the end of the government’s furlough support scheme, the UK unemployment rate has continued to fall, avoiding the jobs cliff-edge many feared.
Omicron Uncertainty Overlooked
Despite solid fundamentals, the emergence of Omicron threw rate hike prospects into disarray. With the UK government announcing a slew of fresh measures (mandatory mask wearing, return to WFH) and the risk of further measures being announced ahead of or over the holiday period, many market watchers shifted view and assumed the BOE would wait until February, by which point the bulk of winter would be behind us and the true threat from Omicron (including government response) would be known.
Feb Hike In Question
Looking ahead, the BOE noted that it expected Omicron to represent a short-term threat, with the longer term economic recovery still on track to progress. The 8-1 vote in favour of the rate hike reflects the sentiment within the BOE currently with market pricing for a further hike in February. With this in mind, GBP looks primed for further upside so long as there is no intensification in COVID measures. Currently, the government is advising that lockdown is unlikely though cannot be ruled out. If lockdown can be avoided ahead of February, a further rate hike will be the focus. Any return to lockdown ahead of that meeting will see the next hike pushed out. Essentially, the main driver for GBP over the coming months will be the path of omicron and how the government responds.
Technical Views
GBPUSD
The reaction in GBPUSD represents the current dynamic very well. The initial bullish surprise in response to the decision was dampened by growing omicron fears. For now, GBPUSD has stalled into a test of the 1.3349 level (not quite the fireworks I was looking for). Given the bear channel, while price holds below here, the focus is on further downside. Above here, however, the focus shifts to 1.3461 next and the channel top above.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.