By Yasin Ebrahim

Investing.com — The pound surged against the dollar Tuesday as a stronger-than-expected labor market is expected to give the Bank of England the green light to continue hiking rates ahead of the record U.K. inflation report expected Wednesday. 

Increased 1.4% to $1.2484

The UK saw a drop of 3.7% over the March three-month period, which was the lowest since 1974. However, there were more job opportunities than ever before at 1.3million. 

“This morning we have just seen a strong set of UK employment/wage data which will be a tick in the ‘continue tightening’ side of the Bank of England’s policy calculus ledger,” ING said in a note.

By year end, the Bank of England will increase rates by 2.2%. Three times, rates have been raised by the Bank of England to 1% in total since it began its tightening cycle.  

However, sterling may see its downtrend resuming as the danger of the recession and a Brexit driven trade war continue to loom.

“If the row about the Northern Ireland Protocol between the UK and the EU was to intensify and lead to a fully-blown trade war this might intensify the BoE’s and the financial market’s economic concerns,” Commerzbank said in a note.

Others, however, downplay the imminent threat of U.K. and EU trade war amid pressure from the US and a lack of appetite among Boris Johnson’s Conservative members.

“Sterling seems to be ignoring Northern Ireland politics at the moment – perhaps because Conservative backbenchers and also US politicians are leaning on the UK government not to go ahead with unilateral actions on the Northern Ireland protocol,” ING added.

On Wednesday, betting on another BoE rate increase will be a hot topic. The UK will report its fastest pace of inflation since 1988. This is due to a rise in energy prices.

”All eyes in the UK tomorrow will be on April’s inflation report. Given the 54% hike in household energy bills last month, the headline CPI rate is expected to jump more than 2ppts to above 9%Y/Y for the first time since the series began in 1988,” Daiwa Capital Markets said.

The U.K. faces an “apocalyptic” spike in global food prices, fueled by the Russia-Ukraine conflict, Bank of England governor Andrew Bailey said on Monday.