Average wages in the UK slowed again in April after a surprise jump in March. With the Bank of England putting a lot of weight on this data, as well as the next CPI data, the chances of a pause at the June meeting have slightly increased.

The Bank of England may keep interest rates on hold in June if Tuesday's data shows a slowdown in UK wage growth, which could weaken the pound, ING said earlier. Francesco Pesole, a Dutch international analyst, said in a note that sterling will be "extremely sensitive" to the data, as the Bank of England stressed that its next policy decision will be largely dependent on wage and inflation data. He said there was "considerable downside risk" to sterling if wage growth slowed and prompted the Bank of England to keep interest rates on hold in June, as markets were pricing in a 20 basis point rise. There is no doubt that the price action of the pound reflects this, EUR/GBP has broken above 0.8700 as the Sonia curve is no longer pricing in further boe tightening, and ING believes that EUR/GBP still has plenty of upside and expects EUR/GBP to rebound above 0.8800 by the end of the month.

A policy of higher interest rates may initially attract yield-seeking capital, but it also increases the likelihood of a recession, with any sharp downturn in the economy likely to cause investors to sell the pound. Lorenzo Di Mattia, chief investment officer at Sibilla Capital, a London-based macro hedge fund, said the pound was due to peak and the tightening cycle would hit the UK much harder than Europe or the US because in the UK people have less savings and more mortgages and higher interest rates are really bad for the economy. CFTC data also showed that hedge funds generally reduced their bets on a stronger pound.

The International Monetary Fund (IMF) has warned that the UK is the only G-7 country likely to experience a recession this year. "There is growing concern that fighting inflation will come at the expense of the economy," said Rodrigo Catril, strategist at National Australia Bank in Sydney. "Sterling has done well before, so profit-taking is also attractive." Signs that the Bank of England is preparing to pause its tightening cycle could test sterling's top performance among G-10 currencies this year.

And there's no question that if the pound weakens, bullish bets from Goldman Sachs and Jefferies LLC would be under threat, with persistent U.K. inflation predicting further gains against currencies such as the euro. Goldman Sachs believes that the headwinds facing the pound in 2022 - mainly gas and energy prices, Brexit-related frictions and the relative stance of Bank of England policy - have now shifted in a less negative direction. As a result, Goldman Sachs said it still prefers to short EUR/GBP with a target of 0.86 and a stop loss of 0.88. Goldman Sachs said that despite being vulnerable to further risk aversion, it remains bullish on the pound, especially after the Bank of England's recent meeting. The Bank of England's policy stance is no longer an outlier in the G10, with the previous negative impact on sterling turning positive and Goldman Sachs also recommending investors go long GBP/euro.