GBP/USD Forecast: Sterling at 2018 highs on rate hike expectations targeting 1.4500

  • GBP/USD breaks to new 2018 highs and the highest level since Brexit referendum slump in 2016 on wage growth and rate hike expectations.
  • The UK wages are expected to rise 3.0% in three months to February turning positive in real, inflation-adjusted terms for the first time since January 2017.

Sterling is trading up 0.2% at around 1.4370 against the US Dollar on Tuesday ahead of the key UK labor market report for March. The GBP/USD currency pair is well supported by expectations of rising wages in the UK that will encourage the Bank of England to go forward with the interest rate hike in May.

The US Dollar did not find any major support at the beginning of this week after the weekend air strikes of joint military forces of the US, France, and Great Britain on Syria’s banned weapons infrastructure and the geopolitical risk on the FX market dissipated.

The UK labor market report is expected to deliver 3.0% in three months ending in February, rising faster than inflation for the first time since January 2017 when inflation reached 1.8% y/y while wages rose 2.2% y/y. The unemployment rate is expected to stick to four decades low of 4.3% in three months to February while claimant count is seen increasing 1.1K in March.
 
The UK inflation is due on Wednesday and it is expected to decelerate further in March to 2.6% y/y with core inflation adjusted for prices of food and energy rising 2.4% in March, unchanged from February. With inflation decelerating from December peak of 3.0% and wages rising, the end of the period of negative real wages is set to end which is good news for UK shoppers. That is particularly evident in the UK retail sales that unexpectedly fell lower in January and rose only 0.1% m/m in February this year while they are expected to fall 1.7% m/m again when auto fuel is discounted.
 
GBP/USD is now trading around 1.4370, the highest level in 2018 and also the highest level of the currency pair since the Brexit-related slump from 1.5000 at the night of the Brexit referendum to 1.1920 post Brexit low from October 7, 2016.

Technically GBP/USD broke up back to the upward trending channel that has begun on March 1 after the UK reached a Brexit withdrawal deal with European Union with the negotiating period extension to December 2020. Breaking above 1.4346 resistance zone opens the way for further upside with market eyeing 1.4500 figure level and 1.5000 swing high and important psychological level.

Technical oscillators like Momentum and the Relative Strength Index (RSI) are pointing upwards on 1-hour chart and the Slow Stochastics also made a bullish crossover although only in the neutral territory. The fundamental push for Sterling higher is supported by the interest rate outlook presented earlier this week by the Bank of England Monetary Policy Committee member Ian McCafferty.

GBP/USD 1-hour chart


 

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