GBP/USD bulls move in and eye UK CPI to confirm a hawkish bias at BoE

GBP/USD was last trading at 1.2426, up 0.41% on the day, and has traveled from a low of 1.2366 to a high of 1.2449 so far. The market has been dominated by a correction in the US Dollar that has enabled GBP/USD to move up despite an unexpected rise in the unemployment rate in the three months to February.

UK data gave the markets a mixed labor report with the Unemployment for the three months ending February that was expected to remain steady at 3.7% instead rose a tick to 3.8%. However, average hourly earnings came in at 5.9% YoY vs. the 5.1% expected and a revised 5.9% (was 5.7%) previously.  Excluding bonuses, earnings grew even faster at 6.6% YoY. With the pay growth staying higher than forecast, this could prompt the Bank of England to hike its interest rate again in May which is supporting the price of the Pound Sterling. 

UK CPI eyed

´´Wage growth has remained sticky, which helps explain some of the recent upside surprises in the inflation data,´´ analysts at Brown Brothers Harriman explained, noting that March Consumer Price Index will be reported tomorrow. In this regardd, the headline is expected at 9.8% YoY vs. 10.4% in February, core is expected at 6.0% YoY vs. 62% in February, and CPIH is expected at 8.7% YoY vs. 9.2% in February.

Analysts at TD Securities explained that ´´inflation is proving stickier than the MPC expected in its February projections.´´ The analysts note that ´´both core goods and services prices are proving persistent. March's inflation data is likely to be boosted by rail fares and food.´´ The analysts argue that ´´the risks to our forecast lie around the latter: we assume that despite some improvement in supplies, prices remained moderately high through March, as seen elsewhere in Europe in other March inflation data.´´

The inflation data on Wednesday could cement expectations for the Bank of England to raise interest rates further, supporting GBP/USD as the data would confirm recent views of BoE chief economist Huw Pill that inflation is proving much harder to bring under control than anticipated. 

BoE tightening expectations have picked up 

The next Bank of England policy meeting is May 11 and analysts at Brown Brothers Harriman note that the WIRP suggests around 90% odds of a 25 bp hike, with another 25 bp hike priced in for August 3. ´´The odds of one last hike in September or November top out near 20%.  As a result, the peak policy rate is seen near 4.75% vs. between 4.50-4.75% at the start of last week.´´