GBP/USD: Longs stretched but acceleration to 1.30 may gather momentum depending on Wednesday’s CPI – SocGen

GBP/USD pauses after a 1.95% gain last week. Economists at Société Générale analyze GBP outlook ahead of the UK Consumer Price Index (CPI) data and the Bank of England (BoE) meeting this week.

A hawkish split with some members preferring 50 bps for the first time since January is not impossible

The acceleration in UK core inflation to a new high of 6.8% in May and wages ex-bonuses to 7.2% YoY in April sparked a dramatic repricing of the implied BoE terminal rate in the past two weeks from 5% to 6%. Whether we ultimately get there remains to be seen, but the bank could double down in the statement that tighter policy is required to rein in second-round effects. Compared to the UK, core inflation in the Eurozone and the US is 5.3%. 

A hawkish split with some members preferring 50 bps for the first time since January is not impossible if core CPI surprises to the upside on Wednesday, the day before the rate decision. 

We are mindful of technically stretched levels in Sterling and profit talking, but won’t rule out further appreciation just yet of GBP/USD towards 1.30 and depreciation of EUR/GBP towards 0.85 and 0.8475 (1.18 GBP/EUR).