Cable on Track for Remarkable Recovery after Hawkish BoE Messaging

GBP/USD Analysis

Bank of England Unconvinced about Recent Inflation Progress

The Bank of England’s statement on Thursday dismissed recent progress in the fight against inflation in a broad warning against complacency. The Monetary Policy Committee (MPC) could not conclusively express that both wage growth and services inflation were definitely on the path to lower levels.

October’s inflation data which was released last month revealed a massive step in the right direction as both core and headline measures of inflation made notable declines. However, the BoE has focused intently on services inflation, a pocket of underlying price pressures which are yet to show conclusive signs of easing.

The committee warned that interest rates will need to be sufficiently restrictive for a sufficiently long period to achieve the 2% price target. In addition, one third of the nine voting members are still voting for rate hikes.

GBP/USD On Track for Impressive Weekly Comeback

Ahead of the Fed and BoE meetings this week, GBP/USD (cable) eased into the 200-day simple moving average (SMA), testing the dynamic level of support before the sharp rise. The 200 SMA acted as a springboard for cable as prices look to close the week above the November seeing high of 1.2736.

While it was Wednesday’s dovish Fed statement and press conference that resulted in a weaker dollar, and by extension a move higher in GBP/USD, the biggest catalyst this week came in the form of the Bank of England standing firm despite somewhat misleading improvements in inflation.

There is very little standing in the way of the 1.3000 level but this is a fair distance away from current levels, perhaps requiring another catalyst which may appear in next weeks high impact economic data (see below economic calendar). Immediate support appears at the prior swing high of 1.2736.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

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Major Event Risk Ahead (GBP/USD)

Next week the Office for National Statistics (ONS) releases the latest UK inflation data. Market participants will be eager to find out if October’s notable drop-off continued into November, which may unravel some of sterling’s gains that have been acquired after a relatively hawkish BoE statement on Thursday.

We then get the final US GDP data for Q3 which already witnessed an upward revision, followed by the final UK GDP print for the same quarter – which is likely to make for some grim reading. Rounding off next week’s tier 1 economic data is US PCE data and the final print of the University of Michigan consumer sentiment print. US sentiment is said to have improved in December after 4 consecutive months of declines.

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX