What will happen to the pound?

By 20/10/2021News

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The Bank of England is seriously concerned about raising interest rates. On Sunday, its chairman Andrew Bailey stressed, not for the first time, that the central bank “will have to act” as rising inflation becomes a problem. What does this mean for the pound and the traders who trade it?



Since last week the Bank of England has been actively signalling to the market that it is time to raise rates. Although everyone has inflation on the rise, even the Fed is in no hurry to raise rates (but is preparing to roll back bond purchases).
And while the Fed and ECB argue that rising prices will still be temporary, Andrew Bailey says that inflation above 2.0% is worrisome, which means it must be dealt with to prevent such levels becoming chronic.
The Bank of England interest rate is now at a record low of 0.10%. But the markets already estimate a 90% probability of a 25 basis point increase at the November meeting. By February the rate could rise by 50 basis points.
And how is the pound reacting to this? It would seem that with such hawkish statements, sterling should be on the rise. And it is. But somehow it is sluggish and mostly at the expense of a falling dollar index.
So what is it? Judging by the statements of the other members of the Monetary Policy Committee, not everyone supports such a radical Bailey plan. This means that the Governor of the Bank of England will have to work hard to persuade his colleagues to vote for a rate hike.
And even if that happens, it will probably not be unanimous. But so far, judging by the reaction of the pound, market participants prefer to proceed cautiously.
What should traders do now? Based on the technical picture, GBPUSD still has room to move up to the 1.4000 area if it manages to pass the current resistance near 1.3800.
Above the level of 1.4000 the pair has not been above since mid-June, and if it manages to consolidate above this level, the next target for strengthening will be near the highs of February and May (~1.4200).
And if the Bank of England does indeed raise the rate at the next meeting, sterling could go up in earnest. But, let’s not get ahead of ourselves, there is not much time left until 4 November.

08.00 UK consumer price index for September
11.00 September Consumer Price Index for the Eurozone
14.00 Canadian September Consumer Price Index

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