Escalating inflation in the UK and persistent labour market tightness, at least in the near term, are shifting yield spread trends. This may suggest a pause in GBP/USD’s slide, economists at Westpac report.

UK’s inflation surge and tight labour market are shifting yield spreads

“UK household energy pricing caps drove a surge in April CPI and increase concerns of an acute cost of living crunch that may be evident in the coming week’s consumer and retail data and surveys. Although weaker consumer activity might reduce BoE’s hiking path, the tightness of the UK’s labour market was also in evidence this week.” 

“Failure to curb inflation could trigger higher wage settlements and so exacerbate matters by adding second-round inflation pressures at a time when GBP depreciation may also be adding to external inflation drivers. Markets therefore sharply repriced UK rates despite BoE caution, notably lifting short-end rates.”

“Stuttering confidence in US growth has now seen US yields pull back from recent highs. The combination has at least paused if not turned recent trends in UK-US yield spreads. Even if this proves to be short-lived, such shifts may establish a period of GBP/USD range trading (1.22-1.26).”