- GBP/USD has been under some renewed selling pressure after fresh data showed that the UK labor market may be cooling, giving investors some relief that the Bank of England may start cutting interest rates this year, perhaps as early as the end of the summer.
- Concurrently, GBP/USD is trading around 1.2740 at the time of writing ahead of US inflation figures and the Fed decision.
According to economic calendar data, UK wage growth remains strong, but the unemployment rate unexpectedly rose to 4.4%, the highest since September 2021, and the number of vacancies is still falling. Other key economic indicators to watch this week include monthly GDP, industrial production, construction output, and the trade balance. In addition, uncertainty about the general election in early July adds to economic unpredictability.
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According to Forex trading, the pound fell against the euro and the US dollar after the UK reported job losses and higher unemployment in the latest employment figures. However, losses will be limited by high wage increases and the priority of next week’s inflation report. Also, The pound fell to 1.1807 against the euro in the minutes after the Office for National Statistics announced that the UK unemployment rate rose to 4.4% in April, surprising the market which had expected the rate to remain unchanged at 4.3%. Additionally, it was reported that unemployment claims rose to 50.4K in May, compared to 8.4K previously. In general, the recovery in the pound is due to wage rates which remain strong in Britain, which will keep inflation high and mean that the Bank of England will not be able to cut as quickly and as quickly as markets expected just a month ago. According to the announcement, average earnings, including bonuses, rose by 5.9% in April, faster than the consensus forecast of 5.7%. Wages rose 6.0%, in line with estimates, when bonuses are not included.
Commenting on this, analysts at XM.com brokerage say: "The weakness of sterling could have been more widespread if average earnings growth figures had not remained stable with the index excluding bonuses, which is again recording 6% growth year-on-year."
So, these wage rates are certainly not consistent with the Bank of England's mandate to bring inflation back to 2.0% on a sustainable basis. According to analysts at XTB brokerage, "Both wage growth rates can be considered too high to justify a Bank of England rate cut in August. Currently, the swap market is pricing in a 44% chance of a Bank of England rate cut in November, and we don't. So far, we expect these labor market data to change a lot unless we get a surprise reading, especially for wage data."
Despite the headline unemployment rate rising, Richard Carter, head of interest rate research at Quilter Cheviot, says the labor market “remains in fairly solid shape, and earnings growth remains strong as we head into the general election”. Moreover, “What the BoE will want to see crucially is wage inflation falling further than it has been, especially with headline inflation close to target,” the analyst added, “The BoE will be very cautious about cutting interest rates at a time when consumer spending power is high and could lead to a new bout of inflation.”
If the UK unemployment rate rises further in the coming months, the pressure on wages will start to ease, and this is likely to be reflected in a decline in domestic core inflation rates. Obviously, this would be the scenario that would make the Bank of England more confident in approaching rate cuts. While some MPC members want to cut now (Ramsden and Dhingra), most will want to see clear evidence that the economy is turning. And they will find little reason to follow the ECB's strategy of cutting interest rates and then wait several months before following up with another cut.
All eyes are now on the UK inflation release next week and the Bank of England decision, the two major events for the British pound in June.
Technical forecasts for the GPB/USD pair today:
According to the performance on the daily chart attached, the GBP/USD price is still on a neutral path and bulls will remain in control as long as it maintains the resistance level of 1.2775. Moreover, the upward trend will strengthen if it moves towards the psychological resistance of 1.3000. obviously, this requires weaker than expected numbers for US inflation and followers of the US Federal Reserve today with a less hawkish tone. On the other hand, and over the same period of time, the support level of 1.2600 will remain the most important for the strength of the bears' control over the trend.
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