Sterling is vulnerable into a “finely balanced” MPC meeting, but renewed restrictions may tilt MPC to be on hold. Failure to rebound off 1.3150-75 risks further slides to 1.2850, economists at Westpac report.

UK toughening up restrictions

“Domestic political stress has accelerated the decision to adopt more stringent covid restrictions. The renewed restrictions also highlight the uncertainties referenced by Dep. Gov. Broadbent this week ahead of MPC’s ‘finely balanced’ meeting on Dec 16th and may well be sufficient to stay the MPC’s hand.”

“MPC will be monitoring how UK’s labour market reacts as the distortions from the now-ended furlough scheme unwind. A slide in UK’s claimant rate could be a signal of increasing labour market tightness and inflation risks. However, renewed restrictions should outweigh data near-term.”

“Renewed restrictions should outweigh data near term. GBP/USD has met 1.3150-75 retracement support. Failure to sustain rebounds (stops above 1.3300?) could trigger slides towards 1.2825-50.”