- Pound Sterling jumps strongly on upbeat UK labor market data, higher wage growth.
- The growth in average earnings was higher than expected, allowing BoE to maintain a hawkish narrative.
- The US inflation data will guide further action in the GBP/USD pair.
The Pound Sterling (GBP) discovers a stellar buying interest in Tuesday’s early European session as the United Kingdom Office for National Statistics (ONS) has reported upbeat employment data for the three months ending December. The labor demand remains upbeat, and Average Earnings rose at a higher pace than the expectations of market participants.
Hiring from UK employers remained strong as business owners are optimistic about the economic outlook due to receding recession fears, easing price pressures, and hopes of rate cuts by the Bank of England (BoE).
While wage growth momentum was higher than market expectations, the pace was slower than readings in the three months ending November. This indicates that progress in the labor cost declining towards the required 2% target level has slowed. It suggests the BoE will be able to maintain an argument in favor of keeping interest rates at their current level for a more extended period. This has boosted the Pound Sterling as higher interest rates tend to attract more foreign inflows.
Investors brace for higher volatility in the GBP/USD pair as the United States Bureau of Labor Statistics (BLS) will report January’s Consumer Price Index (CPI) data on Tuesday. The appeal for the GBP/USD will strengthen if the inflation data remains softer than expected. The US Dollar would face a sell-off as soft inflation data would allow the Fed to adopt a dovish interest rate stance sooner, which will increase foreign outflows
Daily Digest Market Movers: Pound Sterling rises ahead of US, UK Inflation data
- Pound Sterling witnesses strong buying interest as the United Kingdom ONS has reported upbeat Employment data for three months ending December.
- The Unemployment Rate falls significantly to 3.8% against expectations of 4.0% and the prior reading of 4.2%.
- UK employers recruited 72K workers in December, similar to 73K labor additions in November.
- In January, Claimant Count Change was higher at 14.1K against a 5.5K reading in December.
- The reduction in Average Earnings (both with and without bonuses) for three months ending December was slower than expected, which is expected to allow Bank of England policymakers to push back expectations of early rate cuts.
- Average Earnings Excluding Bonus’ grew by 6.2% against expectations of 6.0% and the former release of 6.7% (revised from 6.6%). The economic data, including bonuses, rose at a higher pace of 5.8% against the consensus of 5.6% but remained slower than the prior reading of 6.7% (revised from 6.5%).
- Going forward, investors will focus on the UK Inflation data for January, which will be published on Wednesday.
- The outlook for the Pound Sterling remains upbeat as investors hope the BoE will start reducing its benchmark rates after the Federal Reserve (Fed).
- The CME FedWatch tool shows that the Fed will start unwinding its restrictive monetary policy stance in May.
- The Fed’s current outlook on interest rates will be impacted after the release of the United States inflation data for January, which will be published at 13:30 GMT.
- According to the estimates, the headline inflation grew at a slower pace of 3.0% against 3.4% in December. In the same period, core inflation that excludes volatile food and oil prices decelerated slightly to 3.8% from 3.9%.
- Investors anticipate the monthly headline to rise steadily by 0.2% and 0.3%, respectively.
- A soft inflation report would raise expectations of an early rate cut by the Fed in January.
Technical Analysis: Pound Sterling refreshes weekly high above 1.2660
Pound Sterling advances vertically to 1.2666 on upbeat labor market data. The GBP/USD pair prints a fresh weekly high. The asset is sustaining comfortably above the 50-day Exponential Moving Average (EMA), which trades around 1.2636. The outlook for the Pound Sterling will strengthen if it manages to sustain above the 20-day EMA, which trades near 1.2660.
The 14-period Relative Strength Index (RSI) rebounds from 40.00, which indicates that market participants have utilized the correction as a buying opportunity. A bullish momentum would emerge if the RSI (14) climbs above 60.00.
(This story was corrected on February 13 at 12:37 GMT to say that “While wage growth momentum was higher than market expectations, the pace was slower than readings in the three months ending November.” Not December as formerly written.”)
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.