Pound hits three week high as dollar slides

The British pound climbed to its highest level in about three weeks against the US dollar on Friday, as a softer greenback met a Bank of England governor who sounded frustrated with inflation but not yet alarmed by it. At the same time, the Bank of Japan repeated that it will keep raising rates. Together, these comments shift some of the focus in currency markets away from the Federal Reserve and toward the other big central banks.

Bailey: inflation "enormously frustrating", spillover still subdued

Speaking at an Institute of International Finance meeting in Bangkok, on the sidelines of the IMF and World Bank annual meetings, Governor Andrew Bailey said UK inflation of 3.1% in August remained "enormously frustrating". He blamed the overshoot of the 2% target on conflicts in the Middle East, according to Reuters reporting carried by RTÉ.

The key question for the Bank is whether high energy prices feed through into wages and wider prices, the so called second round effects. On that, Bailey was cautious: "I think it's too early, but to the extent we've seen evidence, so far it's been quite subdued." He added that businesses are focused on cost cutting and on the difficulty of passing higher energy costs on to customers. He also said the UK economy is "actually turning out to be more resilient than we expected it to be".

That mix leans slightly hawkish without committing to anything. Bank Rate stands at 3.75% after a six to three vote to hold in September, with the three dissenters wanting a hike. Reuters reports that most economists now expect the Bank to start raising rates next month. The schedule from here is UK inflation data next week, the Budget on 28 October and the next rate decision on 5 November. Our guide to central bank rate decisions explains why the path matters more than any single meeting.

Why the pound rose

GBP/USD traded at 1.3338 on Friday afternoon in London, up 66 pips or about 0.5% from Thursday's close of 1.3272, with a daily range of 1.3269 to 1.3348, according to ForexTraders. FXStreet earlier noted the pair at its highest in three weeks near 1.3320.

It would be easy to credit Bailey for the move, but the timing says otherwise. Sterling barely reacted when he spoke and only rose later in the session, alongside broad dollar weakness. FXStreet reported the US dollar index at a two week low near 101.70 after Fed Chair Kevin Warsh avoided signalling a rate path. In other words, the pound gained mostly because the dollar lost, with Bailey's tone simply not standing in the way.

Yen and euro: the other side of the move

USD/JPY traded in a tight channel below 158.00. In a speech read by Deputy Governor Shinichi Uchida, Bank of Japan Governor Kazuo Ueda said the bank will continue to raise its policy rate in line with economic, price and financial developments. For yen traders, that keeps the policy gap with the Fed in focus. EUR/USD rose toward 1.1250 in the European morning, also helped by the softer dollar.

What it means for gold

Gold benefited from the same softer dollar. FXStreet reported the metal close to $4,200 early on Friday after a gain of more than 1.5% on Thursday, before it slipped back near $4,160 later in the day as US Treasury yields edged higher. Higher rate expectations outside the US do not change that picture much. For gold, the dollar and US yields remain the main drivers, as our gold signals guide explains.

What this means for signal traders

Separate the story from the driver. A headline about Bailey does not mean Bailey moved the pound. Check whether a move matches the timing of the news before trading on it.
Mark the UK calendar. UK inflation next week, the Budget on 28 October and the Bank decision on 5 November can each move GBP pairs sharply. Spreads often widen around them.
Keep stops defined. Pound and yen pairs can reverse quickly when central bank expectations shift. A predefined stop loss limits the damage when they do.
Watch the dollar first. Much of Friday's action in majors and gold traced back to the dollar and US yields, not to local news.

None of this predicts the next move. It frames the conditions under which any forex or gold signal will play out. The methodology page explains how our trade ideas are scored.

Sources

Keep reading

Central bank rate decisions · Major pairs guide · London and New York sessions · VIP plans

Trading FX and CFDs involves significant risk of loss and is not suitable for all investors. This article is educational and not personalised investment advice. Past performance is not indicative of future results.

Pound hits three week high as Bailey calls UK inflation frustrating