British pound continues to rise amid lingering inflation concerns

The British pound has continued its rise against the US dollar, buoyed by the latest data revealing modest growth in the UK economy during the month of April. However, persistent concerns over stubborn inflation are still influencing the currency’s gains.

At the time of writing, the pound is up 0.3% against the dollar, while also strengthening against the euro to reach 85.49 pence. According to figures released by the Office for National Statistics on Wednesday, the growth in April’s economy was primarily driven by the retail and film industries, signalling slow growth rather than a recession. However, the manufacturing and construction sectors experienced contractions during the same period.

ING FX strategist Francesco Pesole, commented on the figures, stating, “The figures were pretty good. It’s encouraging news if you compare it to where we were at the end of last year with the energy crisis when the outlook for the UK economy looked extremely grim.” However, he highlighted that Tuesday’s wage data overshadowed the GDP reading, as it indicates alarming levels of inflation that show no signs of abating.

The wage data revealed a record-breaking annual UK wage growth of 7.2% (excluding bonuses) in the three months leading up to April, excluding data from the COVID-19 pandemic period. This revelation has prompted traders to increase their expectations of how many rate hikes the Bank of England (BoE) will implement in its tightening cycle. Currently, there is a 79% probability of a 25-basis-point rate rise at the upcoming meeting, along with a 21% chance of a 50 bps increase in the interest rate policy rate (IRPR). Some are even speculating that the BoE’s Bank Rate, currently at 4.5%, could potentially reach as high as 5.7% by the end of 2023.

To combat inflation, the BoE has already raised interest rates 12 times since late 2021, starting from a mere 0.1%. BoE Governor Andrew Bailey highlighted that the wage data reflects a “very tight” labour market and acknowledged that inflation has been slower to recede than anticipated.

The recent developments in the UK stand in contrast to the expected trajectory of the US Federal Reserve, which is widely anticipated to leave interest rates unchanged for the first time since March 2022 in its upcoming meeting on Wednesday.

With UK short-dated gilt yields inching up to a 15-year high following the market opening on Wednesday, and the mortgage market already displaying signs of strain in recent weeks, all eyes are now on the upcoming consumer price index, scheduled to be released on June 21, a day prior to the BoE’s convening.