While the British pound seems poised for gains, especially given its recent slump, yesterday's comments by Bank of England policymaker Catherine Mann did not allow buyers to consolidate around weekly highs. After all, it is far from certain that the regulator will not pause its rate-hiking campaign at the September meeting. This was stated by Bank of England Governor Andrew Bailey last week.
However, Mann noted yesterday that she would likely support further interest rate hikes to combat inflation, warning that investors kept counting on an increasing risk premium to account for future price shocks.
Mann, the most hawkish member of the Bank of England's nine-member Monetary Policy Committee, urged officials to consider further tightening to prevent the crystallization of prolonged inflation risks. "Holding rates constant at the current level risks enabling further inflation persistence which will have to be unwound eventually with a worse trade-off," the official said.
As I mentioned earlier, these remarks contradict those of her colleagues, who suggest that the Bank of England is nearing the end of its quickest tightening cycle in over three decades. Bank of England Governor Andrew Bailey hinted last week that the next hike might be near the cycle's peak, while BoE Chief Economist Huw Pill advocated for a strategy of keeping rates high for a longer period without further increases.
Notably, a contentious Bank of England meeting is scheduled for next week, with markets paring back bets on higher interest rates. Bailey and Pill pointed to several ways to bring inflation back to the 2% target, suggesting that a wait-and-see policy might inflict less damage on the economy than further rate increases.
However, Mann also highlighted a growing risk that consumer and business expectations regarding inflation would break away from the Bank of England's goal, boosting the risk premium that investors demand for holding UK assets. "I worry that there is an increasing inflation risk premium being priced into the UK's macroeconomic prospects," she said.
Even though wages in the UK continue to grow at a record pace, recent data have shown that price pressures, the labor market, and the economy as a whole are starting to weaken. Investors are currently pricing in only one more rate hike by the Bank of England.
Mann was one of two BoE rate-setters to support a bigger half-point rate increase last month. In her speech, she warned that policymakers should anticipate a world where inflation is likely to be volatile and interest rates are higher than before.
From a technical point of view, the British pound continues to trade upwards. At the same time, further gains are possible only after bulls take control of the 1.2530 mark. In this case, sterling will have a chance of recovering to the area of 1.2560, after which a more pronounced surge to 1.2700 is likely. In case of a decline, bears will try to regain control of 1.2484. If the price breaks through this level, the GBP/USD pair will dip to the low of 1.2440 and then probably to the 1.2400 mark.
As for today's outlook for the EUR/USD pair, bears have slightly loosened their grip. To maintain control of the market, buyers need to push the price above 1.0720. In this case, the euro will return to the 1.0760 mark and then climb to 1.0790. However, this task will be challenging without support from major players. In a bear case scenario, major buyers are expected to take the lead at around 1.0720. In case of their subdued activity in this area, it would be a wise decision to wait for the price to fall below the 1.0690 low or to go long from 1.0665.
