GBP/USD Forecast: Unbearable lightness of Sterling still targets resistance at 1.4400 as BoE is set to raise rates in May

• The UK macro data disappointed this week sending GBP/USD 200 pips off its post-Brexit high since Monday.
• Combination of decelerating inflation and robust wage growth support pickup in consumers demand.
• Strong wages are by far the most important indicator the Bank of England considers now as it is expected to raise rates on May 10, 2018.

The GBP/USD is trading on the downside for the third day in a row on Thursday as the UK macro data mostly disappointed while the UK Prime Minister Theresa May suffered a major defeat in the House of Lords.

While politics plays the only complementary role, the vote of 100 votes majority in the upper chamber of the Parliament presses Theresa May to seek a post-Brexit customs union with the EU, something that the hardline wing of her Conservative party hates to the bone. Customs union with EU after Brexit would ease pressure on mutual business and trade both areas of little progress so far in Brexit negotiations.

The GBP/USD is trading about 200 pips off its fresh post-Brexit high of 1.4377  from Monday as Sterling is losing the ground on a streak of mostly disappointing macro data in the UK. On Tuesday, the wage growth missed the expectations with the average weekly earnings rising 2.8% y/y compared to 3.0% y/y expected, even with the unemployment rate falling to new for decades low of 4.2%. On Wednesday, the UK inflation rose 2.5% over the year in March, missing the forecast of 2.6% y/y increase while core inflation decelerated to 2.3% y/y.

The third hit in a row came from the March retail sales report that saw total retail sales falling 1.2% over the month while retail sales adjusted for motor fuel fell 0.5% m/m.

The outlook for GBP/USD is formed by the Bank of England’s monetary policy and on balance, there is nothing from the recent data that alters the market view of the Bank of England hiking the Bank rate on May 10 this year. In terms of monetary policy outlook, the combination of inflation and the labor market tightness is the most important issue.

Decelerating inflation is a fundamentally positive factor as it brings the UK inflation back closer to 2% inflation target set by the Bank of England, helps real, inflation-adjusted wages return back to positive territory and supports the aggregate demand of households promoting growth. Moreover, central bank officials are looking at the 2-3 years horizon while setting interest rates, and current labor market tightness possible generating unbearably strong wage pressure on inflation in the long run. Therefore on balance of inflation and wage growth, the bigger weigh is on wages for now, even with inflation being the principal target. And the view of the Bank of England hiking rates is the most fundamentally important cushion beneath current slide of Sterling on its long-term crawl higher.

Looking at the technical picture, the GBPUSD is moving in a long-term upward trending channel since March 2017. The crossover of 100-day and 50-day moving average on a daily chart is in a bullish uptrend uninterrupted for more than a year now, with 50-days moving average at 1.4020 being the near-term support. On its way higher, the GBP/USD needs to break 1.4400 key resistance representing 61.8% Fibonacci retracement of GBPUSD tracking the pair back from 1.5880 on June 2015 to post Brexit low of 1.1940 in October 2016.

GBP/USD daily chart