GBP/USD steady above 1.3800 amid risk-on sentiment

• The British pound extends its three-day rally, relying on hawkish comments of BoE’s Governor Bailey.
• UK’s softer than expected inflation will not change the Bank of England intention of hiking rates.
• The US Dollar Index has fallen almost 1% in the current week, despite higher US T-bond yields.

The GBP/USD advances as the New York session ends and the Asian session begins, up a minimal 0.02% exchanges hands at 1.3824 during the day at the time of writing. The North American session positive sentiment has carried onto the Asian session. The major Asian equity futures indices rise between 0.01% and 1.45%, except the Japanese Topix, which drops 0.25%.

The British pound has rallied in the last three days on the back of hawkish comments by Bank of England members. However, on the same days, the pound stalled around 1.3845, it seems due to higher US T-bond yields, with the 10-benchmark note rate being just ten basis points short of the 2021 year high, currently at 1.66%.

Despite the rising US bond yields, the greenback has been falling throughout the week 0.71%, with the US Dollar Index sitting at 93.60 at press time.

UK’s softer than expected inflation will not deter the Bank of England from raising rates 

On the macroeconomic front, inflation in the United Kingdom for September slowed surprisingly, but it would not stop the Bank of England from hiking interest rates as soon as the next month.

The headline Consumer Price Index (CPI) for the UK rose by 3.1% on an annual basis, lower than the August 3.2% increase, as reported by the Office for National Statistics. The so-called Core CPI, excluding food and energy prices, expanded by 2.9% shorter than the 3% estimated by economists.

Overall the market expectations that the BoE will be the first among the major central banks to raise rates stills, due to investors betting it will do it by the November meeting.

In the last monetary policy meeting, the BoE said it expected inflation to rise above 4% in the Q4 of 2021, but energy prices have risen sharply since then.

On Sunday, BoE Governor Andrew Bailey said that the central bank would “have to act” to curb inflationary forces. Furthermore, he noted that inflation “will last longer, and it will, of course, get into the annual numbers for longer as a consequence.” Moreover, he reiterated that “we, at the Bank of England, have signaled, and this is another signal that we will have to act.”

Federal Reserve policymakers, ready to announce the bond tapering by FOMC’s November meeting

The US economic docket is absent except for the EIA Crude Oil inventories and Federal Reserve speakers. 

On Wednesday, the Federal Reserve Vice-chairman Randal Quarles said that the test for a bond taper has been met and supports the decision at the November meeting to reduce the QE asset purchases by the first half of 2022.

Later on the same day, Cleveland’s Federal Reserve President Loretta Mester said that “The Federal Reserve should begin tapering its asset purchases soon, but the US central bank is not likely to raise interest rates in the near term.” She added that “So far medium and longer-run inflation expectations are consistent with 2% inflation goal.”