GBP/USD bears in the market as profit taking kicks in

GBP/USD is flat in late New York trade, under pressure however, and falling away from 1.2467 highs as profit taking kicks in. GBP/USD has traveled between a low of 1.2404 and a high of 1.2467 so far. 

Data on Thursday revealed that the United Kingdom´s inflation is far more persistent and the highest in Western Europe. Headline inflation dropped to 10.1% in March from February's 10.4%. However, this was above expectations for the forecasted drop to 9.8%. The Office for National Statistics showed price pressures all over and has raised the prospect of the Bank of England having to raise rates more than previously expected.

´´The market reacted by repricing peak rates by 30bp from where they were at the end of last week, now suggesting we will get 3 more 25bp hikes between now and September,´´ analysts at Societe Generale said.

´´That matches the hikes expected from the ECB, and contrasts with the single 25bp hike that is priced-in for the Fed (before being reversed by the end of the year). GBP/USD has been tracking rate differentials closely since November (after the chaos of the previous weeks).´´

However, there is a concern over the impact of high prices on households and businesses which is stalling the bid in the Pound Sterling. For instance, real wages in Britain, earnings adjusted for inflation, recently showed one of the biggest drops on record in the three months to February, with a fall of 4.1% year on year. Nevertheless, money markets are pricing in rates peaking at around 5% in November this year vs. last month's expectation of around 4.00%.

´´I struggle with the idea that the UK will have higher rates than the US by the end of this year,´´ Kit Juckes, an economist at Societe Generale said.

 ´´The idea that the MPC will act three more times before pausing seems implausible even if they are worried that they have done too little so far. And if there is a pause, then a US-led slowdown will probably prevent the hikes re-starting (if there is no US slowdown, the Fed won’t be easing),´´ Juckes argued, adding:

´´The repricing of UK supports Sterling as long as rates, and not growth, drive FX, but I fear the positive impact of the rates outlook for GBP/USD will fade long before.´´