GBP USD Poised for US Inflation Data

The pound could only edge higher versus a slightly weakening dollar on Wednesday amid deep uncertainty about the future path of the Bank of England’s (BoE) monetary policy.

BoE Chief Economist Huw Pill – who voted with the majority on the Monetary Policy Committee last week to hike interest rates by 25 basis points to 0.5% – said on Wednesday that it was reasonable for central banks to resist providing detailed guidance on the policy outlook as economic prospects were not clear cut.

“A case can be made for a measured rather than activist approach to policy decisions,” Pill told Britain’s Society of Professional Economists on Wednesday. “That is what I would label a ‘steady handed’ approach.”

Pill’s comments reflected BoE Governor Andrew Bailey’s stance, who said last week not to take for granted the central bank was embarking on a long series of rate hikes. Additionally, the central bank’s downward inflation forecasts assumed interest rates would be below its 2% target by mid-2023.

Money markets are pricing in a 25-basis points rate increase in March and 125-basis points by December 2022.

By this morning, GBP USD had eased from a high of 1.358 on Wednesday to 1.353.

Pace of Fed policy tightening in focus

The dollar was subdued a day out from the US consumer price print that could provide clues about the pace of the Federal Reserve’s policy tightening – with money markets currently pricing in more than a 60% probability of a 50-basis points interest rate hike next month.

The Fed will have to act faster than it has done previously to remove accommodation and curb above-target inflation, but a half-percentage-point interest rate lift-off may not be necessary in March, Cleveland Fed Bank President Loretta Mester said on Wednesday.

Inflation could cool to above 2% later this year as supply constraints are resolved and the central bank reels in some of the support it provided the economy during the Covid-19 pandemic, Mester said.

“I don’t like taking anything off the table,” Mester said during a European Economics and Financial Centre virtual event. “But, you know, I don’t think there’s any compelling case to start with a 50-basis-point” rate increase.

Looking ahead

US inflation data is in sharp focus today. Economists forecast consumer prices in January to reach 7.3% compared to last year, which would be the fastest price rise since early 1982 – a print that would cement expectations that the Fed will be more aggressive with rate hikes this year.

Investors will also be keeping a close eye on political developments in Downing Street, as Prime Minister Boris Johnson battles to keep his job. On Tuesday, he reshuffled his administration to appease lawmakers angered by ‘partygate’.

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