Bailey Notes BOE Flexibility

GBP is starting the week under a  bit of pressure following comments from BOE governor Bailey yesterday. Speaking at a conference in France, Bailey noted that the BOE would not be shifting its 2% inflation target though did explain that the bank has some flexibility regarding timing and how quickly it brings inflation back to target. According to Bailey, however, it is “absolutely critical” that flexibility around timing is not seen as the bank no longer targeting 2%.

Shift in Inflation Targeting?

Recently there has been some debate around the potential for the BOE to shift its inflation target from 2% to 3%. Supporters suggest that doing so would avert the need for the BOE to hike rates too aggressively, avoiding a harsher economic downturn. However, Bailey warned that such a move would 1, cause the BOE to lose all credibility and 2, lead to inflation becoming entrenched at higher levels with inflation expectations rising and lenders charging higher rates across the board.

Growth Concerns

While Bailey accepted that there were “more severe issues” in the UK than in many other G7 economies, he remains confident that inflation will be brought back to target. At last reading, CPI in the UK was at 8.7%, more than 400% above the BOE’s target. With UK rates set to move higher while inflation remains elevated, the growth outlook is now drawing more concern which might start to pull GBP lower as we move forward.

Technical Views

GBPUSD

The rally off the retest of the broken bull channel top has seen price trading back up to test the YTD highs around 1.2815. This area is holding as resistance for now. With momentum studies bullish, the focus is on a further push higher and a test of 1.2992 next. Should we break below 1.2659 support, however, 1.2437 will be the next level to note.