BOE Pill. The 2nd round effects of inflation may be stronger.
The desk interprets the recent commentary from the Bank of England's Chief Economist, Huw Pill, as a signal that the central bank is increasingly concerned about the potential for stronger second-round effects of inflation. Per the full note source, Pill emphasized the need to focus on these effects, although he does not expect them to reach the depths seen in 2022. This commentary comes at a time when GBP/USD is under pressure, trading at new session lows as the dollar strengthens amidst political uncertainty in the UK. The market is also reacting to technical levels, with GBP/USD breaking below the 100-day moving average at 1.3481, a key support level that had previously held firm.
What the desk is arguing
The desk frames this as a pivotal moment for the BoE, suggesting that the central bank's focus on second-round inflation effects indicates a more hawkish stance than previously anticipated. Pill's comments highlight the importance of addressing inflationary pressures that could become entrenched, which is critical as the UK economy navigates a complex geopolitical landscape.
Supporting this view, the recent stall in disinflationary trends prior to the Iran conflict suggests that inflation dynamics are more volatile than previously thought. The GBP/USD's movement below the 100-day moving average reinforces the notion that traders are reacting to both economic fundamentals and technical signals, reflecting a cautious sentiment towards the pound.
Where it sits in our coverage
Our consensus target for GBP/USD stands at 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan, which supports a slightly bullish outlook, while bofa presents a more cautious stance at the lower end of the range. The desk's call is positioned near the upper bound of the consensus spread, suggesting a potential for further upside if inflationary pressures persist.
How other firms see it
Firms like jpmorgan and citi appear to be aligned with the desk's interpretation, emphasizing the need for vigilance regarding inflation. Conversely, bofa and deutsche express skepticism about the pound's strength, citing potential headwinds from political uncertainty.
Traders should also keep an eye on related currency pairs such as EUR/GBP, which may reflect shifts in sentiment towards the UK economy, and the potential impact of BoE policy decisions on broader market dynamics.
What the calendar says
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The BOE's Pill is speaking and says: The 2nd round effects on inflation may be stronger They should be focused on attacking those 2nd round effects on inflation They do not expect 2nd round effects to be as deep as 2022. Disinflation stalled before the Iran conflict. The GBPUSD istrading to new session lows as the USD buying and the political uncertainty weighs on the GBP.
The price is also breaking below the 100 day MA at 1.3481 . Recall from yesterday price bounced off that level. This article was written by Greg Michalowski at investinglive.com.
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