25.11.202109:53 Forex Analysis & Reviews: The Bank of England is trying to manipulate inflation through the labor market

Pound remains under pressure as there seems to be very little hope for a policy change, which traders are counting on in December.

Bank of England Governor Andrew Bailey recently said that they have to start trimming the £ 895 billion balance sheet that was spent on buying bonds to boost the UK economy during the pandemic. "You can't have that much balance," Bailey said. "It needs to get down, and it needs policies that bring it down."

Although the statements hint that the Bank of England will soon end its bond purchase program, nothing was said about when to start tightening monetary policy to prevent a rapid rise in inflation. It seems that Bailey is serious about sticking to the dovish stance he made back in October.

Some economists suggested that the central bank keep the bonds on the balance sheet until maturity, but Bailey's comment indicates that they may sell bonds in the near future as a form of policy tightening. He also said that they will maintain the size of the portfolio until the key interest rate rises to at least 0.5%. Investors expect the first rate hike to happen on December 16, and then hit the 0.5% threshold next year.

Bailey also mentioned the labor market and stressed that the problems there worry him most compared to inflation.

Talking about statistics, the UK private sector reportedly rose more than expected in November, with composite PMI hitting 57.7 points. Although it is lower than the 57.8 points in October, a reading above 50.0 points indicates increased activity. The growth in the services sector also outpaced the recovery in manufacturing, even though the latter posted the strongest growth in three months.

The combination of stable business growth, recovery in the labor market and record inflationary pressures gives the green light for raising interest rates in December this year. But the market seems to think differently, so pound continued to lose ground against dollar.

Meanwhile, Bank of England member Jonathan Haskel recently said that interest rates in the UK will have to be raised even if the labor market remains the most problematic area. He advised that the central bank be vigilant despite the fact that most of the current inflation is caused by external factors like energy prices. He also mentioned that the economy has almost recovered from the shock caused by the pandemic.

The latest data on manufacturing orders prove this, as it has posted the strongest growth since 1977. According to the Confederation of British Industry, orders rose by 26% in November, thanks to the 3% gain in exports. However, serious supply-side problems continue to put pressure on companies' ability to meet demand.

Talking about GBP/USD, a lot depends on 1.3345 because a breakout could lead to a further decline to the bottom of the 33rd figure and to 1.3255. Meanwhile, a rise above 1.3385 opens opportunities to hit 1.3440 and 1.3505.

EUR

Much of trading depended on the data that Germany released yesterday as other statistics for the eurozone either did not come out or was weaker than anticipated.

Business sentiment in Germany eased in November as the fourth wave of the pandemic lowered expectations, especially in the service sector. According to the Ifo Institute, the business confidence index fell to 96.5 points because companies are less satisfied with the current state of affairs. Meanwhile, the indicator for current conditions was 99.0 points, in line with the forecasts of economists. The index of expectations, on the other hand, dropped to 94.2 points.

Ifo President Clemens Fuest said supply problems and the fourth wave of coronavirus are challenging German companies, which is bad to the economy since it was already struggling even before the recent tightening of restrictions related to Covid. The situation is expected to exacerbate in December, when rules are tightened again.

Talking about EUR/USD, a lot depends on 1.1185 because a breakout would lead to a further fall to the base of the 11th figure and to 1.1035. Meanwhile, a rise above 1.1250 will open opportunities to climb to 1.1320 and 1.1380.