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Pound supported by Bailey's briefing

GBP - British Pound

Given the recent downbeat news on the UK economy with regards to spiking energy costs and haulage issues affecting food and fuel deliveries, one could be forgiven for thinking that the pound should be trading lower than it currently is. However, it is continuing to hold its ground against the US dollar and has pushed higher versus the euro since the start of the week.

The impressive vaccination programme and the roll out of booster jabs is one cause for ongoing support, as well as the economy continuing to perform well despite widespread belief that the powerful growth seen over the summer is starting to fade.

In a speech in London yesterday, Bank of England Governor, Andrew Bailey, gave further support to sterling with upbeat comments about the state of the economy. In a speech at the Society of Professional Economists Annual Dinner, Bailey stated that more members of the Monetary Policy Committee were leaning towards tightening monetary policy sooner than previously thought.

He also said that although he expects the current elevated level of inflation to be temporary he did warn that should it become entrenched, the bank would need to act to ensure the recovery wasn't derailed. The remarks were enough to push GBP/USD back above 1.37. However it has drifted lower this morning as the US dollar’s safety is sought as stock markets slip into the red. GBP/EUR has held onto the 1.17 handle for the time being.

Key Movers

It appears it could be several weeks or even months before the new German government is formed as Olaf Sholz, leader of the Social Democrats, who won the largest share of the vote, looks to woo the Greens and Liberals into forming a new coalition. To get them onboard there will likely be much debate and lobbying to create a mandate that is palatable to all sides. It isn’t inconceivable that Chancellor Angela Merkel's successor of the CDU/CSU party, Armin Laschet, may step in to form a government should Sholz fail to unify the parties and get the 50% share of the Bundestag that he needs. The longer the discussions drag on, we could see added downward pressure to the euro as the uncertainty impacts business confidence in the Eurozone’s largest economy.

Stock markets around the world are lower this morning which has led to some US dollar buying. It appears that concerns over the supply of energy that is impacting Chinese factories is hitting investor sentiment as well as jitters over the upcoming US debt ceiling negotiations and COVID-19 concerns as we head into the winter.

This week is dominated by central bank talk with The European Central Bank's Christine Lagarde, the Federal Reserve's Jay Powell, and the Bank of England's Andrew Bailey all due to take part in a virtual discussion at 4:45pm tomorrow hosted by the ECB.

This Friday’s Core Personal Consumption Expenditure data from the States, which is another gauge of inflation, will likely be the key mover of rates as we head into the weekend. EUR/USD trades at 1.1680.

Expected Ranges

GBP/USD: 1.36 - 1.3750 ▼

GBP/EUR: 1.1660 - 1.1735 ▲

GBP/AUD: 1.8750 - 1.89 ▼

GBP/NZD: 1.9520 - 1.97 ▲

GBP/CAD: 1.7235 - 1.7370 ▲