Bank of England lawmaker Michael Saunders said he is preparing for interest rate hikes “significantly sooner” as inflationary pressure builds on the British economy, the Telegraph newspaper said on Saturday. Saunders said investors were right to bet on faster increases in borrowing costs with consumer price inflation above 4%. The Bank of England could become the first major central bank to raise rates since the pandemic hit. Last month, the nine-member Monetary Policy Committee voted unanimously to keep rates at 0.1%. But Saunders and Lieutenant Governor Dave Ramsden voted to halt the Bank of England’s government bond purchases ahead of schedule.
Saunders said markets had fully discounted the February rate hike by the British central bank and discounted half of a December increase in borrowing costs. “I’m not trying to comment on which one exactly, but I think it’s appropriate that markets have moved into pricing on an adjustment path significantly earlier than before,” he said. Saunders’ comments came shortly after Bank of England Governor Andrew Bailey said inflation above the central bank’s 2.0% target was worrisome and had to be managed to prevent it from taking permanent hold.
The economic context is not in line with Saunders’ comments. An economy in post-pandemic recovery and with unemployment of 4.6% does not accompany an interest rate hike. Added to all this is the recent drop in fuel supplies, generating shortages in various sectors. The pound, for its part, remains at a recovery level although without long term. We estimate that the opening of tomorrow, Monday, could have a negative effect on the national currency.
GBPUSD remains buy versus early October activity. We do not bet long-term on buyers. We estimate that the maximum levels will remain between 1.3690 and 1.37. If rumors of an interest rate hike increase, two types of market reactions could be expected. Negative: the pound would open lower again testing the 1.36 and 1.3550. Positive: the market would buy the pound passing 1.3560 and 1.3580 to consolidate at the highs in the area. At the moment the sell area remains unchanged.
EURUSD remains buy compared to its start week. The preference is sell below its highs at 1.1580 and 1.1590. Monday’s open could push prices back to test 1.1590 and 1.16. We do not bet on buyers at these levels. On the contrary, with a liquidation below 1.1560 and 1.1550 we return to sell with a minimum of 1.15.
USDCAD has been on sell since the beginning of the month. The current lows begin to form a buy base that was last presented mid-2010. The preference is buy. This week’s inflation data will be directly aligned with this cross and all those related to the dollar. A good inflation result could begin to tempt dollar holders to hold onto the market. Whereas if the data does not cooperate then we have an increase in sell pressure with possible lows of up to 1.24 for the coming week.
XAUUSD remains unchanged. October is not giving the gold market a foothold to enter 1800.0. The commodity keeps testing its highs and then at the floor of 1760.0 and 1750.0. Buyers enter the minimum levels until they test the maximum prices in the area. No changes are foreseen for the month of October.