Sterling surged to fresh four-week highs just below 1.34, buoyed by above-forecast UK employment and healthy payroll data, which likely cements a Bank of England rate hike at the November 5 Monetary Policy Committee meeting.

However, Tuesday's gains may be tempered as the market turns its attention to Wednesday's UK Consumer Price Index data. According to Reuters consensus, both core and headline CPI are expected to rise on a year-on-year basis, which has provided further support for the anticipated rate hike next month.

A potential complication ahead of the BoE's decision is the Autumn Budget, scheduled for October 28. While rising employment and wages could contribute to increased inflation, thus necessitating rate hikes, higher interest rates may exacerbate financial pressures on the UK populace. Should the Labour government adopt a more accommodative stance to alleviate these burdens, concerns may arise that could prompt bond vigilantes to resume selling gilts, consequently applying downside pressure on GBP/USD.

For now, unless Wednesday's UK price data delivers a significant negative surprise, GBP/USD is likely to stay supported. The similar outlook for global inflation outlook and the unwinding of USD long positions – previously driven by more hawkish Fed expectations and European fiscal turmoil – are benefiting sterling, while also impacting EUR/GBP.

Key upside targets for GBP/USD include 1.3406, the September 17 high, followed by 1.3433, the 200-day moving average. Bulls are expected to maintain control as long as GBP/USD remains above 1.3263, the rising 10-day moving average.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)