The Bank of England appears stuck between a rock and a hard place at Thursday's policy meeting, as it decides how to respond to the clashing factors of rising inflation, slowing growth and the fast-spreading Omicron variant, while sterling trends lower.
UK inflation data on Wednesday will be an important hurdle: a Reuters poll predicts a 4.7% year-on-year rise in headline CPI versus 4.2% in October.
A UK manufacturing survey on Monday showed prices rising at the fastest rate since 2000 nL8N2SV4QP, keeping pressure on the BoE to respond, even as growth stalled in October, hit by supply chain problems nL8N2SV16T.
Prime Minister Boris Johnson described the Omicron variant as a 'tidal wave' on Sunday nL8N2SX0NH, announcing a 'Plan B' of restrictions to combat COVID-19, which lawmakers will vote on Tuesday nL8N2SY3PX.
Refinitiv's BOEWATCH shows a 74% chance that rates will remain steady at 0.1% on Dec 16, which would cap the pound, especially as the U.S.
Federal Open Market Committee is expected to intensify its focus on inflation the day before nL1N2SD0VB.
Technically 5, 10 and 21-day moving averages, plus 21-day Bollinger bands head lower, which is a bearish trending setup.
Look for a GBP/USD break of 1.3166, 38.2% of the 2020-2021 rise, opening the door to 1.2830-50, the 50% retracement and October-November 2020 range base.
A close above the 1.3317 falling 21 DMA is needed to end the downtrend.
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