The strongest UK inflation data since February helped sterling rally strongly across the board yesterday. Following a poor start to the week, the surprise inflation figure of 1.9% (market estimates of 1.6%) saw sterling set fresh five-and-a-half year highs against the US dollar and a new 22-month high against the euro as levels near the Bank of England’s (BoE) 2.0% target.
With inflation showing such a significant increase, pressure will mount on the BOE to consider increasing interest rates. Moreover, the BoE Governor Mark Carney stated yesterday that the decision on when to raise interest rate decisions will continue to be ‘data driven’. That being said, wage inflation remains significantly behind the headline inflation rate. Unless we see wages increasing at a similar pace to the headline rate, the Governor of the BOE may well feel it inappropriate to raise interest rates. Labour market released today is expected to show average earnings dropped to 0.5%; as a result, this could push back expectations of a rate hike and hurt sterling.
More key labour data is due to be released today that could cause a significant reaction in the market. After falling to the lowest level since 2009 previously, the unemployment rate is forecast to fall once again to 6.5% which could provide further support to sterling. Alongside this, we will also see the release of figures showing the change in the number of people claiming unemployment benefits.