GBP/USD briefly hit a two-day high of 1.3241 on Friday after U.S. inflation met forecasts by rising to a 39-year high nL1N2SU1EH -- but short of loftier levels some anticipated -- then retreated as the less-transitory view of price growth lingered before Fed and BoE policy meetings next week.
Sterling's knee-jerk reaction proved too ambitious for GBP/USD bulls.
While inflation in the UK is running at 4.2%, more than double the BoE's target of 2%, UK rate hike expectations have steadily declined since the MPC surprised markets by not hiking on Nov 4.
UK GBPOIS markets BOEWATCH indicate a 25% chance for a full 25bp hike at the BoE's Dec.
16 MPC meeting and a 40% chance for a 15bp move.
While the Fed has just begun tapering its APP, there is more hawkish sentiment around its near-term moves, which should continue to propel GBP/USD lower.
Fed hikes are not on the table this month, but expectations that it will accelerate tapering will provide it greater flexibility for earlier rate increases.
Further U.S.-UK policy divergence on Dec.
15-16 could push GBP/USD to new 2021 lows below 1.3162, opening the way for a run at Q4 2020 lows below 1.30.
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