Government urged to act on wage squeeze as UK inflation rate hits 2.9% – as it happened

There’s a danger that the political deadlock in Westminster could push inflation higher in the months ahead, warns Stephen Clarke, economic analyst at the Resolution Foundation.

And that could be particularly bad news for poorer families, if essential purchases like food and clothes keep climbing while benefits remain capped.

Technical considerations are in charge of the GBP/EUR exchange rate on Monday and should dominate trade until the mid-week session when UK employment data is released.

Monday's closing level is key as we are interested in seeing on which side of 1.13 the pair ends the day.

The exchange rate opened the week starting July 10 on 1.13, confirmation of just how important this round level is. In early trade the pair has nudged up to 1.1312.

As we have already noted here, this level is important for the outlook in that a break below 1.13 could finally open the door to weaker levels.

Note that since mid-June the 1.13 has provided bargain-hunters looking for Sterling a decent point to pick the currency up.

1.13 has been tested three times since mid-June yet we have not seen a close below here.

What has tended to happen is the currency recovers back up to 1.14:

So this pair is stuck in a tight range but a break below 1.13 could see the broader trend lower, in place since May extend.

The Pound could be in trouble this week we are told.

RBC Capital Markets have announced a sell on GBP/USD as being their “thematic trade of the week”.

Chief Currency Strategist Adam Cole notes this is an important week for US and UK news and the market goes into it 50% priced for an 25bp rate hike by year-end in both cases.

“In our view, the former should ultimately go to 100% and the latter to zero,” says Cole.

Cole is not optimistic on the UK economy’s outlook saying the real inflation story is not the recent pickup in headline inflation, but the failure of earnings growth to follow.

This week’s labour market data - due on Wednesday - is expected by Cole to show headline earnings growth has fallen well below 2%, leaving wage growth more than 1% point below CPI inflation.

“This strongly suggests the rise in inflation is transitory and the resulting real income squeeze will depress consumer spending,” says Cole.

In the US, markets are seen as being too complacent when it comes to expectations for further Federal Reserve interest rate rises.

“With the forward curve so flat, the hurdle is low for Yellen’s semi-annual testimony to be taken as hawkish,” says Cole.

In addition, GBP’s failure to hold gains above 1.30 is a bearish technical backdrop.

RBC Capital Markets are targeting a fall to 1.2635 in the short-term as their trades have a maximum duration of one week.

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