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GBP/USD Forecast: Monetary Policy and Inflation

The governor of the Bank of England, Andrew Bailey, said that the bank should not react too much to the temporarily high inflation to ensure recovery. During a speech Thursday, Bailey said inflation growth would be a temporary feature and would return to normal. Premature tightening of anti-inflation policy will have a negative impact on the economic recovery.

However, the bank will continue to monitor the inflation outlook. In the event of signs of sustained inflationary pressure, the bank is ready to respond with monetary policy tools, the governor said. At a meeting on monetary policy last week, the bank predicted that inflation will temporarily exceed 3 percent and will return when the impact of rising commodity prices proves to be transient.

The governor said that there are at least three reasons why the rise in inflation should be temporary. First, there are annual effects on the inflation base caused by very low activity and prices last year, which as an arithmetic thing will not last longer than a year. Second, additional price pressures may arise due to various shortages caused by imbalances in the recovery of supply and demand. But these imbalances should not last long. Third, the bank expects the shift from demand for goods to services to move to lift restrictions, balancing the composition of demand. Over time, this should lead to easing inflation as spending is redirected to sectors with more spare capacity.

Bailey also said the economy would return to lower average base inflation rates. Returning to the pre-Covid pattern, the lower growth trend is the goal in the coming period, and it will be a challenge for the UK until it is realized.

Looking at the GBP/USD chart on the daily time frame, we see that the pound is still under pressure. The fall is still very likely down to the moving average of the MA200 to 1.36000, and here we can expect some support and a break for the pound. For the bullish trend, we first need to break above the falling line of resistance in order to continue up.

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