Sterling rose notably Thursday, following the Bank of England tapering decision, and it has been trading flat so far on Friday, awaiting Powell’s speech. At the time of writing, it was seen at around 1.3700.
Hawkish Bank of England sends sterling higher
The Monetary Policy Committee (MPC) of the Bank of England (BoE) left policy unchanged Thursday. However, the central bank announced plans to start reducing its asset purchases. Tapering will begin soon and should end in December 2022. The MPC also noted that the case for tightening had increased since August and that a rate hike before they conclude QE in December can’t be ruled out.
Since inflation is running high, the BoE might be one of the more responsible central banks, and it could start tightening monetary policy the soonest. On the other hand, the economic data in the UK have deteriorated notably, creating a challenging environment for raising rates. Nevertheless, market participants now expect two rate hikes throughout the following year . The GBP/USD pair rose circa 80 pips after the decision.
The risk that the BoE could hike before QE ends is notable, and one we do not dismiss easily. We think that is enough to help GBP trade on its front-foot for the time being, though the magnitude remains elusive,
All eyes on Powell, again
Later today, the calendar is relatively empty, offering only new home sales, which rarely cause any market volatility.
However, all focus will be on the Federal Reserve Chair Jerome Powell, who will deliver opening remarks at an online event hosted by the Federal Reserve. Mr. Powell might offer more information about the current situation in the Fed, where 50% of the FOMC members want to start raising rates next year.
Additionally, he might talk about the tapering plans and when precisely the process will begin, as the Fed failed to provide a specific date at its latest meeting. Volatility will most likely be elevated during and after his speech.
Triple bottom on a daily chart
Yesterday’s massive rally from the 1.36 support documented its importance, and now it looks like an impressive triple bottom pattern, which is a robust bullish formation.
Once again, the target for bulls is at previous highs and lows in the 1.38 area. The 50-day moving average is also located precisely there. The key resistance stands at the psychological level of 1.40. There is also a bullish divergence between the MACD and price, supporting the bullish outlook.
The medium-term trend remains neutral as long as the pair trades within the 1.36 – 1.40 range. In case of a bullish breakout, sterling might attack previous cycle highs at 1.42. Alternatively, if the Pound drops below 1.36, it might revisit the 1.33 support.