Trade idea of the day: GBP/USD to 1.4345?

The pound has resumed its climb versus the dollar as the new week kicks off. Sterling rallied 0.6% versus the dollar in the previous week as Brexit optimism and increased hopes of a rate hike in May from the Bank of England pushed the pound broadly higher.

What: 

The pound has resumed its climb versus the dollar as the new week kicks off. Sterling rallied 0.6% versus the dollar in the previous week as Brexit optimism and increased hopes of a rate hike in May from the Bank of England pushed the pound broadly higher.

This morning the pound is once again on the front foot as fears over an escalation of geopolitical tension over Syria dissipate. 

Whilst the US led military attacks against Assad’s regime will have no doubt infuriated Russia and Iran, principal supporters of Syria, traders are not anticipating a retaliation.

With geopolitical risk fading, traders will be turning their attention to economic data, which is set to take over, particularly given the high impacting nature of the UK data scheduled for this week.

Tomorrow sees the release of the UK jobs data. Whilst the unemployment rate is expected to remain constant at 4.3% average weekly earnings are expected to tick up to 3% in the 3 weeks to February, from 2.8% in the previous month. 

Inflation fell to 2.8% in February, should average earnings print at 3%, this would mean that the squeeze on the consumer was finally easing, as wages will have grown faster than inflation.

Earnings out pacing prices would signal a return to good inflationary pressures, as opposed to the bad inflationary pressure, which the UK economy had been experiencing thanks to the devaluation of the pound post Brexit referendum. 

Despite the Brexit uncertainties that lie ahead, we expect increased good inflationary pressures from higher wages to encourage the BoE to take a more hawkish approach at the May MPC meeting. Higher odds of a rate rise in May would boost the pound.

How: 

GBP/USD is trading 0.4% higher at $1.43, with $1.4345, this years high moving into firmly into sight. $1.4345 also marks the highest level that the pound has traded versus the dollar since the pound dropped from $1.50 the night of the Brexit referendum to $1.1920, its low on October 7th that same year. 

A convincing move through $1.4345 could see GBP/USD advance towards resistance at $1.45.

Prior to the UK release tomorrow, US Retail sales could cause some volatility. After a weak reading of -0.1% in February a rebound to 0.4% in March could offer some support to the dollar which is trading broadly lower. 

Any disappointment from today’s release would give GBP/USD fresh cause for confidence, even though a softer print for US retail sales isn’t expected to impact on the Fed’s recent hawkishness.

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