Sterling Rises as UK Inflation Jumps

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The British pound is in positive territory after falling for three straight days. GBP/USD has pushed above the 1.36 line and is trading at 1.3635 in the North American session, up 0.27% on the day.

UK inflation hits 30-year high

Anyone reading the news has seen plenty of headlines screaming “US inflation hits 30-year high!”. Well, now it’s the turn of the UK to share that unflattering stat, much to the chagrin of policymakers. December CPI rose to 5.4% y/y, up from 5.1% in the previous reading. This marked CPI’s highest level since 1992. Inflation continues to rise due to higher energy costs, strong consumer demand and supply chain disruptions.

Surging inflation forced the Fed to scramble into action and announce a tightening in policy, and the key question is whether the Bank of England respond with another interest rate increase, after a moderate hike of 15 bps to 0.25% in December. At that meeting, the BoE surprised the markets, which had expected the bank to stand pat until early in the New Year. The BoE defended the hike by saying that underlying inflationary pressures necessitated a move. Based on that logic, another hike in February would be a no-brainer, as UK inflation continues to rise. However, given that the BoE has pulled a fast one on the markets over the past two meetings, market participants would do well to display caution ahead of the BoE meeting and not assume that a rate hike is a done deal.

US Treasury rates continue to press upwards. After punching past 1.80% on Tuesday, a 2-year high, the 10-year rate has climbed to 1.90% earlier today before dipping to 1.85%. The 10-year rate hasn’t been above the symbolic 2% level since July 2019, but it looks poised to climb above that line shortly. The jump in US yields is reflective of market concerns that the Fed will accelerate its tightening. Most analysts are projecting three or four rate hikes in 2022, but Jamie Dimon, CEO of JP Morgan, made headlines last week when he projected the Fed would hike six or seven times this year.

GBP/USD Technical Analysis

• 1.3560 is under pressure in support. Below, there is support at 1.3438
• GBP/USD faces resistance at 1.3776 and 1.3870