On Tuesday, the British Pound gained momentum against its major counterparts following the release of the UK labor market data for the three months leading to October. The currency surged as the Average Earnings, excluding bonuses—a crucial indicator of wage growth—climbed to an impressive 5.2%. This figure surpasses the projected 5% and improves on the previous 4.9% increase.
The Bank of England (BoE) keeps a keen eye on wage growth data when considering interest rate decisions, as it’s a significant factor in inflationary pressures within the UK’s service sector.
Interestingly, Average Earnings, including bonuses, also saw a 5.2% rise, outstripping the anticipated 4.6% and higher than the earlier figure of 4.4%.
Despite some less favorable aspects of the labor data, such as the addition of only 173,000 new workers—down from the previous 253,000, later revised up from 219,000—the robust wage growth data bolstered the British Pound. Meanwhile, the ILO Unemployment Rate stayed consistent with expectations at 4.3%.
The increase in wages indicates that inflation in the UK’s service sector might remain elevated. Fresh inflation figures due on Wednesday could show that the core Consumer Price Index (CPI), excluding volatile items, might have grown by 3.6%, up from October’s 3.3%.
This scenario supports the market’s anticipation that the BoE will keep interest rates steady at 4.75% during its monetary policy announcement on Thursday.
Switching gears to currency movements, the British Pound edged higher towards the psychological resistance level of 1.2700 against the US Dollar during Tuesday’s London session. The pair moved upward as the US Dollar Index (DXY) hovered near a three-week high of around 107.00, around the time of the Federal Reserve’s policy meeting on Wednesday.
According to the CME FedWatch tool, there’s a strong consensus among traders that the Fed will drop interest rates by 25 basis points to between 4.25%-4.50%. As this cut in key borrowing rates is highly anticipated, investors will look to Fed Chair Jerome Powell’s press conference comments and the dot plot for future interest rate indications.
Market observers believe the Fed might tweak its policy from “dovish” to “slightly hawkish,” considering potential inflationary pressures are rising while employment risks are declining, based on the latest Bloomberg survey. The Flash US S&P Global PMI report for December indicated an uptick in employment, marking its first rise in five months, thanks to growth in both manufacturing jobs and service sector employment.
In Tuesday’s trading, all eyes were on the release of the monthly US Retail Sales data for November at 13:30 GMT. This retail data, a key measure of consumer spending, was anticipated to show a 0.5% increase, surpassing the prior 0.4%.
From a technical analysis perspective, the British Pound aimed to surpass the 20-day Exponential Moving Average (EMA), reaching near 1.2815 against the US Dollar. The GBP/USD pair bounced back after finding support near the upward-sloping trendline around 1.2600, originating from the October 2023 low of approximately 1.2035. The 14-day Relative Strength Index (RSI) sits between 40.00-60.00, indicating a sideways trend.
On the downside, the pair is expected to stabilize around the psychological support level of 1.2500, while on the upside, the 200-day EMA around 1.2710 will provide significant resistance.
Finally, the economic calendar highlighted the UK Core Consumer Price Index (CPI) as a key indicator, published by the Office for National Statistics. This index measures inflation by comparing monthly prices to those a year ago, excluding volatile factors like food and energy. A higher reading is typically bullish for the Pound Sterling.
