Pound Jumps as US Inflation Jumps

#OPINIONLEADER#

The British pound finally woke up this week and has punched past the 1.36 level. GBP/USD is trading at 1.3615, up 0.78% on the day.

The highly anticipated US inflation reading did not disappoint, coming in a 7.5% y/y for January. This beat the forecast of 7.3% and was up from 7.0% in December. US inflation continues to climb, but the US dollar couldn’t take advantage and was broadly lower against the majors today, with the exception of the yen. Perhaps investors are getting accustomed to red-hot inflation, and the fact that the Fed rate hike in March is a foregone conclusion may have dampened any urge to rush and buy US dollars. The markets are in the dark after March, with no clear guidance from the Fed as to how many hikes we’ll see in 2022.

The Fed will not be pleased with the latest CPI report, as it puts pressure on policymakers to seriously consider a drastic 0.50% hike in order to put a leash on surging inflationary pressures. The January CPI report was not only the highest since February 1982, but also showed broad-based strength, leading to the conclusion that the Fed may have to be aggressive in its tightening campaign, despite some Fed members saying that 3 or 4 hikes should be sufficient to tame inflation.

Across the pond, financial markets shrugged off last week’s BoE quarter-point hike, which raised rates to 0.50%. The meeting was significant in that the vote was a tight 5-4 decision, with four members of the Monetary Policy Committee (MPC) voting to raise rates by 50 basis points. This points to deep divisions at the MPC and will complicate the BoE’s task of providing clear guidance to the markets, which could result in volatility for the pound. BoE Governor Bailey has a credibility problem after the markets badly misread his rate moves late last year, and the close vote demonstrates that a large minority of the MPC are not towing the line on monetary policy.

GBP/USD Technical Analysis

• GBP/USD is putting pressure on resistance at 1.3642. Above, there is resistance at 1.3756
• There is support at 1.3400 and 1.3272