Pound jumps on strong mfg. data

European markets have got off to a strong start to February, after last night‘s push back by a number of Federal Reserve officials, who poured cold water on some of the hawkish narratives being put out with respect to the Federal Reserve’s hiking timeline.

This timely corrective, from the likes of Bostic, George and Daly, appears to have reset expectations of a 25bps move in March, and away from the narrative that had been suggesting we might see a move of 50bps.GBP/USD has resumed its upswing after a quiet start to the week. GBP/USD is trading at 1.3261 in the North American session, up 0.75% on the day.

It was just one week ago that the pound was in the dumps, falling to the symbolic 1.30 line. Since then, the currency has gone on a tear, gaining around 2%. With plenty of turbulence and uncertainty, from the Ukraine war to oil prices to sizzling inflation, we could see further volatility in the currency markets in the short term.

UK industrial order expectations for March jumped to 26, up from 20 in February and above the estimate of 16. Manufacturing output remains strong, as the sector continues to expand. The strong reading helped boost the pound today.

More inflation on the way？

The UK releases the February inflation report on Wednesday, with the markets bracing for an acceleration in inflation. The headline reading is expected to rise to 4.2% YoY, up from 4%, while Core CPI is projected to climb to 5.0%, up from 4.4%. The BoE continues to revise its inflation forecast upwards and has warned that CPI could hit a staggering 10% by the end of the year. The Bank has raised rates three straight times and seems likely to continue tightening in order to curb red-hot inflation.

The surge in inflation has made government borrowing more expensive, and the cost of servicing the UKs national debt continues to rise. This poses a serious problem for Chancellor Rishi Sunak, who will deliver the annual budget on Wednesday. Consumers and businesses will be looking for goodies in the budget, but Sunak may be limited in what he can do, as he must allocate billions of pounds more for borrowing costs as a result of inflation and higher interest rates.

In the US, Fed Chair Powell delivered a strong, hawkish message to the markets on Monday. Powell came out swinging, saying that the Fed was prepared to be more aggressive in raising rates if needed. Powell‘s message was crystal clear, as he noted that “the labor market is very strong, and inflation is much too strong” and said that the Fed would not hesitate to implement 50-basis point increases at future meetings if necessary. In response to Powell’s hawkish message, US Treasury yields rose on Monday to their highest level since 2019 and the upswing has continued on Tuesday, with the 10-year Treasury yield rising to 2.37%.

GBP/USD Technical

GBP/USD has broken above resistance at 1.3259. Above, there is resistance at 1.3341There is support at 1.3130 and 1.3048