This weeks fundamental driver for the GBP would be from the UK CPI.
In one of his most recent interviews, MPC member Ian McCafferty said that inflation should reach the bottom in spring, which coincides with the peak of the wage-bargaining season.
“More than two thirds of pay settlements are agreed between January and April, a period the MPC will be watching ‘very carefully’. If the current ultra-low inflation outlook has a ‘material impact’ and drives down wage deals, the risk is this exceptional period could be prolonged,” McCafferty said on February 19.
Further on wages, February MPC minutes said that “it was also possible that wage growth would be influenced by the weakness of headline CPI inflation. There was a chance that this would lead to lower pay deals than otherwise, especially if it were accompanied by a perception that inflation would be below the target not just in the near term, but in the medium term too.”
Martin Weale, another member of the BoE’s nine-strong rate-setting committee, dismissed those concerns recently saying that “the risk that [inflation] expectations may be depressing wage growth is very real, but at present my concerns are that wage growth is accelerating rather than declining, while unemployment continues to fall rapidly.”
“If wage growth continues to accelerate over the next few months, especially in the absence of a pick-up in productivity, then for me it strengthens the case for a rise in Bank Rate,” Weale said during his speech at City and Islington Sixth Form College in London on March 11.
So we want to look for a negative deviation, because if CPI drops below 0.0% it will cause traders to be wary of when they think the Bank of England will look at raising interest rates. So if this figures comes in lower than expected we could see a sustained fall lower in the GBP across the board – and the reason we think this is because it could cause the Bank of England to delay rate hikes for even longer.
However if we get a better than expected reading we could see those fears fade away and we could get some GBP strength for the rest of the session.
There’s also a lot of political risks to the GBP due to the upcoming elections which will likely cause the GBP to remain weaker over the coming weeks / months.