GBP/USD Spikes amid Robust UK Inflation, Buckle Up for US FOMC & Fed Fund Rate

• UK Consumer Price Index increased by 4.6 percent in the year to November 2021, up from 3.8 percent in the previous year.
• Economists are expecting no change in the Federal Funds Rate, and it’s likely to be steady at 0.25%.
• A break below the 1.3212 support level will allow the selling trend to continue until 1.3150.

The GBP/USD pair spiked to trade at the 1.3260 level amid stronger than expected UK inflation figures. The day before, GBP/USD closed at $1.3238 after hitting a high of $1.3257 and a low of $1.3190. The direct currency pair changed its momentum and turned green on Wednesday, despite the strength of the US dollar. That’s mainly because of the positive developments in the UK and the inflation figures.

GBP/USD fly rockets amid robust UK inflation figures 

The Consumer Price Index, which includes owner-occupier housing expenses (CPIH), increased by 4.6 percent in the year to November 2021, up from 3.8 percent in the previous year. The strongest upward contributions to the 12-month CPIH inflation rate in November 2021 came from transportation (1.34 percentage points, primarily from motor fuels and used automobiles) and housing and household services (1.28 percentage points). On a monthly basis, the CPIH climbed by 0.6 percent in November 2021, after falling by 0.1 percent in November 2020.

UK to adjust COVID-19 travel red-list

According to Health Secretary Sajid Javid, the British government removed all 11 countries from its COVID-19 travel red-list, and there was now community transmission of Omicron in Britain.

The UK registered more than 4,700 cases of the Omicron variant, and its Prime Minister, Boris Johnson, said that Britain was facing a massive spike in Omicron cases. Johnson also said that at least one person in the UK has died due to the Omicron variant, and about ten people have been hospitalized. The PM announced that he had set a new target of offering booster shots to all adults in England by the end of this month.

According to Johnson, more than half a million people received their booster jabs on Monday, which was incredible, and this optimism added strength to the British Pound, which ultimately helped GBP/USD rise on Tuesday. Furthermore, the positive reports from Pfizer and BioNTech related to their pill against COVID-19 and its efficacy against the Omicron variant also added to the market’s risk sentiment, which ultimately supported the risk-associated currencies like GBP and added further gains in GBP/USD on Tuesday.

The company revealed that their experimental pill against coronavirus, Paxlovid, was effective against Omicron. They also said that two doses of their vaccine shots could provide about 70% protection against Omicron hospitalization and 33% protection against the infection.

A quick look at economic events

At 12:00 GMT, the average earnings index rose to 4.9%, against the forecasted 4.6%, and supported the British Pound. The Claimant Count Change dropped to–49.8K against the forecasted –31.5K and supported Sterling. The UK’s unemployment rate remained unchanged at 4.2%, as expected. At 19:30 GMT, the CB Leading Index remained flat at 0.0%, and the favorable economic data from the UK added further gains to the GBP/USD pair.

From the US side, at 16:00 GMT, the NFIB Small Business Index remained flat with projections of 98.4. At 18:30 GMT, the PPI in November advanced to 0.8%, against the expected 0.5%, and the US dollar was supported. The US dollar was also supported by the Core PPI, which improved to 0.7% in November, against the predicted 0.4%. The strength of the US dollar limited the rising prices of GBP/USD on Tuesday.

The US dollar was strong across the board ahead of the release of the monetary policy statement from the Federal Reserve. The Fed is set to hold its meeting on Wednesday, and before this meeting, investors were taking positions in the market to benefit from the decision. It is expected that the Fed will increase the pace of bond tapering. However, it pushed the DXY higher to the 96.59 level and capped further upside momentum in GBP/USD.

FOMC & Federal Funds Rate in highlights 

The Federal Reserve is likely to announce a dramatic policy shift on Wednesday. It may be paving the stage for the first interest rate hike next year. Markets anticipated that the Fed would accelerate the end of its bond-buying program, shifting the deadline from June to March.

This would allow the Fed to begin raising interest rates from zero. Fed policymakers are expected to give a revised forecast projecting two to three rate hikes in 2022 and three to four more in 2023. Previously, there was no consensus on a rate hike in 2022, even though half of the Fed officials predicted at least one.

Fed officials began considering a speedier taper in mid-November, and they have successfully moved market expectations toward a faster finish to the one-time $120 billion a month in bond purchases. Market expectations have also shifted regarding when interest rates will rise, from late next year to June.

The Fed’s balance sheet, which was $4.1 trillion in January 2020 before the epidemic but has ballooned to $8.7 trillion, is the big unknown for markets. As securities on the balance sheet mature, the Fed replaces them, buying billions more in Treasurys separately each month.

What Can We Expect From the Federal Funds Rate?

Economists are expecting no change in the Federal Funds Rate, and it’s likely to be steady at 0.25%. However, the FOMC Statement and Press Conference will be worth watching.  

GBP/USD daily technical levels

Support Resistance
1.3201 1.3268
1.3162 1.3296
1.3133 1.3335
Pivot Point: 1.3229

GBP/USD to violate symmetrical triangle at 1.3260  

The GBP/USD price forecast is pushing to break over the resistance mark of 1.3260. A spike in bullish pressure can slice through the 1.3260 hurdles. The price can move to the next resistance level at 1.3276. A break over 1.3276 will open the door for the next resistance mark test at 1.3320. A further upward breakout could extend the buying trend all the way to the next resistance level at 1.3370.

The leading technical tools like the RSI and Stochastic RSI are holding above 50, demonstrating an uptrend in GBP/USD, while the 50 days exponential moving average is holding at 1.3240, demonstrating a bullish bias.

On the 2-hour timeframe, the symmetrical triangle pattern suggests a narrow range; however, the GBP/USD seems to violate this pattern. There will be an excellent uptrend continuation in GBP/USD if this happens.

However, a surge in selling pressure below 1.3276 will offer a chance to maintain downward momentum in the near term. The next level of support for GBP/USD is at 1.3220. A break below the 1.3212 support level will allow the selling trend to continue until 1.3150. Good luck, and stay tuned for more updates!