GBP: Hawkish BoE signal and nascent wage inflation to be an added boost – ING

Viraj Patel, Foreign Exchange Strategist at ING, explains that one of the channels through which they expect GBP strength to materialise in the event of a positive transition deal outcome is reaffirmed sentiment over BoE policy tightening.

Key Quotes

“Not only would we see greater market conviction over a May rate hike (currently 70% priced in), but the potential for a re-invigorated UK economy in the near-term could also spur talk of a second BoE rate hike in 2018.”

“The case for a steeper UK rate curve next week would find additional support from:

1.  A Brexit-contingent hawkish signal at the March BoE policy meeting (Thu). While it may be too early for BoE officials to offer markets a clear signal of intent over a forthcoming rate hike – as they did in September 2017 – we do think the reiteration of a resilient UK economy and concerns over sticky above-target inflation will equate to sufficient enough signal to keep UK rates supported.

2.  A series of constructive UK economic data releases - namely core CPI inflation remaining sticky at 2.6% YoY (Tue) and headline wage inflation also showing signs of moving higher (Wed). Feb UK retail sales (Thu) is expected to come in a tad softer - though markets may look through this given the largely weather-related disruptions.”

“If all the cards were to fall perfectly into place for GBP next week - that is the combo of Brexit progress, a status quo hawkish BoE message and constructive UK economic data – we could see a bullish breakout in GBP (especially against a weak USD), and would not rule out a sharp move up towards the year-to-date highs around 1.4250-1.4300 (approx +2.0%).”