The Bank of England may raise interest rates ahead of schedule! The pound rushed higher and then fell back, subject to a strong dollar

On Monday (October 11), the British pound gave up most of the intraday gains against the U.S. dollar. It is currently rising slightly, mainly suppressed by the strong U.S. dollar.


Bank of England officials hinted at the upcoming interest rate hike over the weekend and provided a good intraday boost for the pound on the first day of the new trading week. Bank of England Governor Andrew Bailey warned that unless policymakers take action, there will be a period of extremely damaging inflation. In addition, Sanders, one of the toughest members of the Bank of England’s Monetary Policy Committee, said that investors were right to bet on raising interest rates in advance. He said that as inflationary pressures in the UK economy increase, it is necessary to prepare for a "significantly early" interest rate hike.

CME interest rate futures trading shows that the November contract pricing estimates that the probability of a rate hike next month is 20%, higher than the 12% estimated last week. The pricing of December futures reflects the probability of a 45% rate hike at that time.

"At present, there are more and more people speculating that the Bank of England will tighten policy before the Fed," analysts at ING said. The central bank is actually warning about the second round of high inflation.

The pound against the U.S. dollar once climbed to a two-week high, near the 1.3670-75 area, although it is difficult to continue this trend in the context of a mild recovery in demand for the U.S. dollar. The September non-agricultural employment data released on Friday was disappointing, but it was offset by a sharp upward revision in the data last month, and reiterated the Fed’s expectation that the Fed will soon begin to reduce the scale of asset purchases. The market also seems to have increased their bets on the Fed's interest rate hike in 2022.

Concerns about the recent surge in crude oil prices will trigger inflation, prompting market speculation that the Fed may tighten policy ahead of schedule. The combined effect of these factors pushed the benchmark 10-year U.S. Treasury bond yield to a four-month high, breaking the 1.60% mark last Friday. This, in turn, continues to boost the US dollar and inhibits the subsequent strong and positive trend of the pound against the US dollar, at least for now.

At the same time, concerns about a comeback of stagflation (high inflation, low growth) have reduced investor interest in high-risk assets. This is evident from the weakening of the stock market, which is seen as another positive factor for the safe-haven dollar. Therefore, before making a new bullish bet on the GBP/USD combination and establishing a position for any further appreciation, it is prudent to wait for a strong follow-up.

The UK will not release any major economic data that will affect market trends, and the US currency market will remain closed on Columbus Day. This further allowed investors to stay on the sidelines and limit the gains of the GBP/USD pair, which instead prompted some people to sell at a higher level. Market participants are now looking forward to the UK’s monthly employment details, which are scheduled to be released on Tuesday, when there will be some meaningful trading opportunities.

From a technical point of view, the pound's upward momentum has slowed down significantly, and it has fallen into a shock trend in the short term. Against the background that the US dollar index is expected to continue to strengthen, the pound may resume its downward trend.

The lower support levels focus on 1.3600, 1.3567, and 1.3531, and the upper resistance levels focus on 1.3663, 1.3722, and 1.3751.

(The British pound against the U.S. dollar daily chart)

At 20:50 GMT+8, the British pound was quoted at 1.3626 against the U.S. dollar.