The pound built on its gains from the previous week on Monday, following Bank of England (BoE) Governor Andrew Bailey’s most hawkish comments yet on inflation.
Mr Bailey stoked expectations on Sunday that the central bank is preparing to hike interest rates for the first time since the Covid-crisis struck, amid mounting inflation risks.
Bailey believes that the recent spike in inflation is temporary, but the recent surge in energy prices would push it higher and sustain its climb for longer than initially expected.
Speaking during an online panel discussion organised by the Group of 30 consultative group, Bailey said: “Monetary policy cannot solve supply-side problems – but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations,”
“And that’s why we at the Bank of England have signalled, and this is another such signal, that we will have to act,” adding “But of course that action comes in our monetary policy meetings.”
Speculation is mounting that the BoE will become the first of the world’s biggest central banks to raise interest rates, either late this year or early next.
Dollar softens on factory data and central bank bets
The dollar was perked up slightly on Monday by a fresh bout of risk aversion, following last week’s risk-on mood in markets that dragged it lower – but it was the hawkish remarks from Britain’s central bank chief that drove the GBP USD rate.
The reversal in global risk sentiment was triggered by data showing the Chinese economy slowed by more than expected in the third quarter.
By the afternoon, however, the U.S. currency was feeling the effects of soft factory data and investor bets on faster normalisation of monetary policy in other countries.
U.S. manufacturing output fell by the most in seven months in September as an ongoing global shortage of semiconductors caused motor vehicle output to stall – yet more evidence that supply constraints were restricting economic growth.
Production at U.S. factories dropped 0.7% last month – the largest decline since February and only the second time since April 2020 that manufacturing output fell for two straight months.
By this morning, the GBP USD rate had jumped to 1.3773.
Two notable data sets are scheduled for release from the U.S. economy: building permits and housing starts – both for September.
Speeches by Fed officials Michelle W. Bowman and Christopher J. Waller will be closely monitored by investors on Tuesday for clues on the timing of interest rate rises and stimulus tapering.
Investors must wait until Wednesday for the week’s first influential economic indicators from the UK economy, with the consumer price index and retail price index slated for publication.