Since UK inflation rates for April surprised on the upside last week Sterling has been on the up. Economists at Commerzbank note downside risks for the GBP, though.

Rate hikes to the extent as the market is currently expecting seem exaggerated

“It is quite possible that we will continue to see data surprises over the coming weeks and that inflation turns out to be more stubborn than the BoE is currently expecting. As long as this risk remains in place the market will see no reason to change its rate hike expectations.”

“The latest data publications no doubt provide arguments for further rate hikes. For that reason, Sterling will remain supported short-term. Rate hikes to the extent as the market is currently expecting seem exaggerated though as we assume that sooner or later the data will point to falling price pressure and a further weakening of the economy.”

“We therefore see the risk of a correction of the rate expectations and thus downside risks for Sterling.”