The pound was catapulted to its highest level since 5 May against the dollar on Tuesday following the publication of robust jobs market numbers.
News that Britain’s unemployment rate dropped to its lowest since 1974 in the first three months of 2022 cemented expectations that the Bank of England (BoE) will continue lifting interest rates to cool red-hot inflation.
The labour report also showed that total pay was up 7% compared to a year earlier, outstripping economists’ average forecast for a 5.4% rise.
The jobs market is currently in sharp focus for the BoE, which fears that higher-than-normal pay growth could see the current energy-fuelled rise in inflation become ingrained.
The UK currency was propelled to within touching distance of the 1.25 benchmark as investors raised bets that the BoE’s Monetary Policy Committee will hike borrowing costs by half a percentage point in June.
Money markets are currently pricing in a further 25-basis-point interest rate rise at the UK central bank’s next meeting of rate-setters and a total of 117 basis points of policy tightening by year-end.
Dollar thwarted by jump in risk sentiment
The dollar’s drive higher continued to stall on Tuesday as improving risk sentiment across global markets encouraged investors to seek riskier currencies like the pound.
Consumers in the US increased retail spending In April for the fourth month in a row, seemingly unperturbed by higher prices amid near four decades high inflation.
Retail sales – which form a large part of consumer spending and provide clues about the strength of the US economy – jumped a seasonally adjusted 0.9% last month from March, the Commerce Department reported on Tuesday.
UK consumer price inflation figures are served up by the Office for National Statistics on Wednesday. Inflation, which was 7% in March, is expected to have hit 9.1% in April when a 54% rise in energy tariffs took effect.
The BoE forecasts that further price rises will drag the economy close to recession by the end of the year, increasing unemployment.
A flurry of speaking engagements from Federal Reserve officials on Tuesday could signpost the pace of future policy tightening in the US. Most notably Fed Chair Jerome Powell, who announced a half-percentage-point increase in interest rates earlier this month – the largest hike in over two decades – and indicated that he wouldn’t hesitate to do it again
Building permits and housing stats are published in the US on Wednesday.
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