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25.05.202113:22 Forex Analysis & Reviews: Bank of England maintains a soft policy. Raphael Bostic is rumored to be the next president of the Federal Reserve.

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Pound continued to decline yesterday after the Bank of England ignored the growing fears on UK inflation. Apparently, members believe that any spike on prices will only be short-lived, hence, they expect inflation to return to 2% when economic growth slows.

Exchange Rates 25.05.2021 analysis

Despite that, some investors still hope that the central bank will raise interest rates next year. They said the first step should be the phasing out of bond purchases, followed by a rate hike.

But so far, neither is expected in the coming months, even though UK inflation doubled to 1.5% in April. Inflation expectations, based on market prices, are now at their highest level since 2008, and the so-called "10-year break-even rate" has risen more than 50 points.

Evidently, the only one sounding the alarm is Chief Economist Andy Haldane, who spoke out against keeping the monetary policy unchanged. He said the Bank of England should start easing its bond purchases, citing that high inflation poses a much greater risk than a weak labor market.

Meanwhile, Bank of England member Michael Saunders said he sees no threats to the economy, claiming that even though inflation will eventually exceed the target level, ongoing problems will restrain future price hikes.

As for Governor Andrew Bailey, he promised that the central bank will closely monitor inflation, all while reassuring that everything will remain under control.

All this led to a drop in GBP / USD, but today a lot will depend on 1.4200 as a break above it will set off a larger jump towards 1.4255 and 1.4310. Meanwhile, a consolidation below 1.4140 will result in a further plunge towards 1.4090 and 1.4040.

EUR

Euro broke above 1.2243 yesterday, thanks to the absence of EU statistics and statements from the Federal Reserve. Apparently, the US central bank said it will maintain a soft policy, as opposed to its statements last week, when it hinted that bond purchases may ease in the next meetings.

Exchange Rates 25.05.2021 analysis

Fed members Lael Brainard, Raphael Bostic and James Bullard said they would not be surprised if supply shortages push prices higher in the coming months, but reassured that it will be short-lived because consumer demand is also recovering.

"Long-term inflation expectations are not a concern right now," Brainard said. "If inflation really exceeds our target, the Fed has enough tools and experience to gently pull it down."

On a different note, Atlanta Fed President Raphael Bostic is rumored to be the next head of the central bank. And when interviewed, Bostic said he will pursue a different policy than the current one.

Going back to the euro, a lot depends on 1.2245 today because a break above it will lead to a strong jump towards 1.2294 and 1.2347. Meanwhile, a consolidation below 1.2245 will result in a plunge towards 1.2205 and 1.2160.

Jakub Novak
Analytical expert of InstaForex
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