- According to this week's trading, the pound sterling fell against the euro and the US dollar after Britain announced an unexpected rise in the unemployment rate, but the weakness will be limited due to surprise wage increases that will keep the Bank of England cautious.
- Consequently, the strong downward trend of the GBP/USD currency pair continued with losses extending towards the 1.2408 support level.
- This is the lowest in five months, before settling around the 1.2435 level at the time of writing the analysis.
According to forex trading platforms, the pound sterling fell in value after the Office for National Statistics announced that the unemployment rate in Britain rose to 4.2% in February from 3.9%, higher than the 4.0% the market had expected. The important figure for average earnings (including bonuses) remained steady at 5.6% in February, according to the ONS, but this was higher than the 5.5% the markets had expected. Without bonuses, average earnings rose by 6.0%, down from 6.1% in the previous month, but above the 5.8% the market had expected. Richard Carter, head of fixed income research at Quilter Cheviot, says: "There was further evidence of slowing wage growth. This rise in unemployment, coupled with the gradual decline in wages, suggests a slowdown in the economy."
Commenting on the performance of the currency pair, Kyle Chapman, forex market analyst at ING Group, says: "Overall, I don't see any clear directional signals for sterling in this report. Also, wage growth is still too high to warrant an imminent rate cut." "This number would have to fall significantly for policymakers to feel comfortable that the risks of continued inflation will recede."
According to Andrew Sentance, a former member of the Bank of England's Monetary Policy Committee, regular wage growth in the UK is still "well above" 3% to 4%, which is consistent with an inflation rate of 2%. He added, "Wage growth has fallen by less than two percentage points from its peak of 7.9% last year. There is still a long way to go before wage increases return to a sustainable rate."
Therefore, stronger-than-expected wage figures should provide a layer of protection under the pound sterling, as one analyst suggests they could be outright supportive. Elias Haddad, senior market analyst at BBH, says: "Flat nominal wage growth and rising real wages suggest that UK rate expectations have room to adjust higher in favor of a stronger pound."
Meanwhile, wages remain high by historical standards, which could lead to continued upward pressure on inflation. Moreover, this could keep some Bank of England members cautious about cutting rates. The data will reinforce current market expectations that the Bank of England will cut rates in June or August, bringing it close to the first rate cut by the European Central Bank, which could limit the pound's weakness. But the Fed may not cut rates at all in 2024, meaning the pound is still vulnerable to further weakness.
Another decline in British job vacancies was further evidence of a slowdown in the jobs market, which the Bank of England sees as a reason to combat inflation. Recently, Job vacancies fell to 916,000 in the three months to March, marking the 21st consecutive decline. However, they are still above pre-Covid-19 levels, suggesting that the rise in unemployment will be limited.
Technical forecasts for the GBP/USD pair today:
Technically, the overall trend for the GBP/USD currency pair remains bearish. Despite its recent losses in support at 1.2400, technical indicators point towards strong selling saturation levels. However, the continued factors of strength in the US dollar, represented by the stronger US economic performance and the persistence of the strict policy of the US Federal Reserve, will ensure the continuation of the downward trend for the GBP/USD exchange rate. Moreover, the nearest target for the trend could be supported at 1.2300. Any attempts at an upward rebound will likely be temporary and not sustained. Today, the pound will react to the announcement of British inflation figures, followed by statements from the Governor of the Bank of England.
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