(Kitco News) - Central bankers have gone on the inflation offensive this morning. First of all Bank of England's (BoE) Bailey said "whatever happens we will bring inflation back to its target". This assumes that employment levels and the threat of inflation could be the potential by-product of the most recent hiking cycle and a reduction in QE measures put in place after the financial crisis and the COVID-19 pandemic.
To confirm this BoE's Pill said that a recession is potentially possible later this year and some analysts have noted that the U.K. is probably already in a recession. Bailey also confirmed that a recession is the most likely outcome.
In regards to the next BoE meeting next week, Bailey said that none of the comments from today should be taken as a clue as to what could happen. Having said that, Tenreyro said "I saw the case for raising rates until there was clear data that we had done enough" and inflation numbers have not eased off just yet.
Looking at GBP/USD in recent weeks there has been a massive amount of dollar strength. The pair has moved lower and is currently trading at 1.1424 nearly taking out the level from March 2020. the next support below that is from 1998 at 1.0520. Speaking about the exchange rate Baily said there are dollar-specific factors at work and we have had very volatile markets in the last six weeks.
This all makes for a very interesting Bank of England meeting this week. A rate hike is priced in but there are calls for a 75bps (85% chance according to futures markets) hike and the market will be looking for clues for October's trajectory.
