Pound Faces `Make or Break' Week in Timing of BOE Rate Increase

(Bloomberg) -- The pound's near-term direction is likely to be driven this week by economic data that could determine whether the Bank of England raises interest rates within three months.

Traders will put most weight on U.K. employment figures scheduled for Wednesday, as any evidence of a pickup would signal inflationary pressures beyond the post-Brexit currency effect. Pricing in money markets currently indicates a 76 percent chance that the BOE will raise interest rates by May, up from 51 percent on Feb. 7.

The pound has climbed back above $1.40 after the BOE's Monetary Policy Committee's decision on Feb. 8 boosted speculation of higher borrowing costs in the first half of this year. Inflation data has also surprised to the upside, holding steady at 3 percent in January, well above the central bank's target.

“The BOE surprised everyone by being so openly hawkish, so now every piece of data will be analyzed as a ‘make or break' for a May rate hike,” said Sonja Marten, a currency strategist at DZ Bank AG in Frankfurt, who sees the pound climbing to $1.45 in six months. “Sterling will obviously benefit from evidence that confirms the prospect for a rate hike.”

Wednesday's unemployment data is expected to see basic pay growth holding steady at 2.4 percent, the highest in a year, while the number of people in work rose to a fresh record high. That will be followed by fourth-quarter gross domestic product figures on Thursday, forecast in a Bloomberg survey to show 0.5 percent quarterly growth.

The pound was little changed at $1.4016 as of 10:25 a.m. in London, having climbed 1.4 percent last week, its first weekly gain this month. Sterling dropped 0.2 percent to 88.59 pence per euro.

Investor sentiment on Brexit progress remains a driving factor for the currency. At the weekend, U.K. Prime Minister Theresa May reiterated her desire to seek a bespoke agreement with the European Union. Chief Brexit negotiator David Davis is next to take up the mantle, delivering a speech in Vienna Tuesday.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Keith Jenkins, Neil Chatterjee