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Jan 04 - 08:55 PM

GBP/USD - COMMENT-Bank Of England Expectations Fuel Sterling Strength

By Andrew M Spencer  —  Jan 04 - 07:38 PM

Sterling remains resilient as 2022 begins, fuelled by expectations that the Bank of England will be more proactive in the fight against inflation than the European Central Bank, the Bank of Japan and perhaps even the Federal Reserve.

Refinitiv's BOEWATCH currently prices a 25-basis-point rate hike to 0.50% at the Feb 3 meeting at nearly 80%, while the Click here has a March 16 hike at 61.3%.

Ten-year gilt yields GB10YT=RR have jumped 11bps to 1.085% since their Dec 31 close, 10-year Treasury yields soared 13bps on TradeWeb 10YT=TWEB, while bund DE10YT=RR and JGB JP10YTN=JBTC yields climbed just 4bps and 3.5bps respectively.

GBP/USD is little changed from Friday's 1.3524 close, but sterling is up 0.7% versus the euro and +0.9% against the yen.

There is little to suggest sterling's yield differentials will collapse, with the UK economy growing nZRN003ORI.

Prime Minister Boris Johnson is sticking with 'Plan B' measures despite Omicron nS8N2RI04Band expects England to withstand a surge in COVID-19 infections without shutting down the economy nL8N2TK0YL.

Technically 5, 10 and 21-day moving averages climb, 21-day Bollinger bands head higher, while momentum studies conflict. The positive setup targets a GBP/USD test of 1.3577, 61.8% of the October-December fall.

A close below the 1.3471 10-DMA, a base Monday and Tuesday, would be needed to undermine the topside bias, while a sustained break of the rising 1.3357 21-DMA would be a bearish signal.

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Source:
Refinitiv IFR Research/Market Commentary

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