The British pound rose in the post-UK jobs report against the euro and the dollar, but gains may be limited as investor concerns grow. The bulls moved strongly in the GBP/USD currency pair, starting from the support level 1.2493, with strong gains, towards the resistance level 1.2625 in yesterday’s session, which is the highest in a month. It then settled around the level of 1.2610 at the time of writing.
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The GBP’s initial reaction was to rally after the release of the UK labor report which totally beat analysts’ expectations and indicated that Britain will continue to see high levels of inflation as a result of higher wage settlements. However, the gains may be limited as investors continue to worry that the UK faces a unique inflation problem. The above-consensus list of labor market statistics suggests that the BoE is far from calming the economy enough to bring down inflation. The UK jobs report for June revealed that the country’s unemployment rate unexpectedly fell to 3.8% from 3.9% in March, when in reality the market was looking for a rise to 4.0%. The surprise was driven by a strong rise in employment of 250,000 in the three months through April, surpassing the 182,000 recorded in the three months through March and the consensus expectation of a decline to 150,000.
The decline in the unemployment rate comes despite more people entering the labor market again as the Office for National Statistics reported that the rate of economic inactivity fell during the quarter and throughout the year. The number of claimants further highlighted the “malaise” in the UK labor market as it showed a drop in those seeking out-of-work benefits in the month of May.
Meanwhile, the payroll report delivered more surprises with the Average Earnings (+Bonus) Index showing a 6.5% increase in wages in April, beating forecasts of 6.1% and 6.1% in March. Excluding bonuses, the index showed a 7.2% increase in wages for the month of April, easily beating expectations of 6.9% and March’s reading of 6.8%. All in all, make no mistake, this is a “hot” jobs report and indicates that the economy is proving to be much more resilient than economists had expected in the face of high inflation and rising BoE interest rates.
The Bank of England will have little choice but to continue raising interest rates in this environment, for fear that inflationary expectations become entrenched. The evidence provided by the jobs report is that workers seek wage bonuses, which, combined with higher pricing intentions in firms, risk creating a wage-price spiral.
Sterling continues to be one of the best performers of 2023, driven by economic data releases that beat consensus, of the kind we have seen today. So, in general, the jobs report is supportive, especially as it will anchor expectations for at least another 100bps of rate hikes from the BoE from here. However, it should be noted that such a hike in interest rates could lead to a looming economic recession, which makes the markets jittery.
Indeed, on Monday we saw UK borrowing costs soar (two-year bond yields rose to the highest levels since the mini-budget debacle), yet the pound fell sharply. Normally, the pound sterling is expected to track yields higher, but the decline indicates some concern in the market regarding the financial and economic outlook.
In short, the markets are worried that the combination of higher borrowing costs amid stubborn inflation is a negative mix for UK assets.
While GBP/USD’s upside remains favourable, there are some signs that the rally could be in danger.
- GBPUSD will be very responsive to the US inflation report as well as the tone set by the Federal Reserve on Wednesday night when US policy makers are expected to forgo a rate hike but make a move in July.
- Many analysts are looking to the Federal Reserve to prove its support for the dollar.
- More control of the bulls over the direction of the GBP/USD required moving towards the resistance levels 1.2550 and 1.2630, respectively.
- The dollar gained positive momentum today, as the currency pair may be exposed to profit-taking sales.
On the other hand, according to the performance on the daily chart below, the sterling turned bearish against the dollar, requiring a move towards the support level of 1.2480.
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