Higher Inflation Expectations Keeping the GBP Bullish

GBP/USD has bounced off the 200 daily SMA as inflation slows down in the US while remaining elevated in the UK

Skerdian Meta•Tuesday, January 10, 2023•2 min read

GBP/USD turned massively bearish in September as the sentiment in financial markets turned sour and UK gilt yields surged higher. But that didn’t continue too long after the intervention by the Bank of England stopped the rout and GBP/USD reversed higher.

This pair climbed more than 20 cents higher as it increased from a low of below 1.04 to above 1.24. In the second half of December, we saw some consolidation and a retrace lower, as USD buyers came back after the last round of rate hikes by central banks.

The price pierced below the 200 SMA (purple) on Friday before the US ISM non-manufacturing report was released which showed that services fell into contraction in December. This means that the FED will probably stop with rate hikes soon, which is bearish for the USD.

On the other hand, UK consumer inflation remains elevated. CPI fell to 10.7% from 11.1% in November, but it still remains very high while US CPI is expected to slow further to 6.5% tomorrow, although it might come even lower. So, the divergence in inflation is keeping a divergence in central banks, as BOE’s Pill said yesterday, which will keep GBP/USD bullish, if Powell doesn’t change much.

Comments from BOE Chief Economist Hew Pill

Distinctive domestic factors could make UK inflation more persistent
Sees risks from higher natural gas prices with a tight labor market, adverse labor supply developments and goods market bottlenecks
Domestic factors will strongly influence my monetary policy decisions in the coming months
If imported gas prices remain significantly higher than in the past, then the threat of second-round inflation effects remain
The persistent component of inflation is the relevant object for the MPC’s attention
Supply disruptions appear to have eased in recent months
We are starting to see labor market indicators turn

This is hawkish stuff. The next decision is Feb 2 and the consensus is a 69% chance of a 50 bps hike with the remainder at 25 bps.

GBP/USD Live Chart

GBP/USD

Check out our free forex signals
Follow the top economic events on FX Leaders economic calendar
Trade better, discover more Forex Trading Strategies
Open a FREE Trading Account

ABOUT THE AUTHOR See More

Skerdian Meta

Lead Analyst

Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.