GBP/USD consolidates at 1.3800 on retreat from 1.3835 high

• The pound turns higher to reach one-month highs at 1.3845.
• BoE rate hike speculation remains fuelling sterling's recovery.
• GBP/USD: Monetary tightening might not be enough to lift the pound – MUFG.

The British pound has appreciated beyond 0.5% on Tuesday, favored by a moderate reversal on the USD, to hit one-month highs at 1.3835 before consolidating around the 1.3800 level.

The pound on BoE hike expectations, US dollar weakness

On a broader view, the pair has been performing a solid recovery in October, appreciating a nearly 3% after bouncing from year-to-date lows near 1.3400. The sterling has regained most of the ground lost on the second half of September when it was hammered by concerns about the fuel and labor shortages caused by Brexit restrictions

Furthermore, rising expectations about the possibility that the Bank of England will lead the world’s major central banks on hiking interest rates are also increasing demand for the GBP.

With inflation accelerating at levels almost twice the Bank’s target for price stability, BoE officials have started to openly suggest the possibility of accelerating the monetary policy normalization plan. BoE Governor, Andrew Bailey, has supported this idea, suggesting this weekend that the Bank of England "will have to act" as rising energy prices are threatening to spill over consumer prices.

On the other end, the US dollar pulled lower on Tuesday. The US Dollar Index is trading 0.2% lower on the day, after having bottomed at 93.45, its lowest level in the last three weeks, weighed by a somewhat brighter market mood and a pause on the US Treasury bond’s rally.

GBP/USD: BoE’s aggressive rate hike cycle, not enough to lift the pound – MUFG

From a broader perspective, the FX analysis team at MUFG warns about further GBP weakness when monetary tightening is confirmed: The faster pace of tightening poses some upside risk to our pound forecasts in the near term. However, we are still sticking to our view that the GBP is more likely to weaken heading into year-end given the more challenging backdrop of slowing global growth, higher inflation and tightening liquidity conditions which should be less supportive for risk assets and high beta currencies like the pound.”

Technical levels to watch