GBP/USD rebounds on better than expected UK wages and jobs data
Fawad Razaqzada July 12, 2017 11:23 AM
The latest UK earnings data was released this morning and unfortunately nominal wages fell again which meant that real incomes declined further. However, the headline 1.8% reading, which was down from 2.1% previously, was bang in line with the expectations.
Over the past week and a half, market participants have been forced to reduce their Bank of England rate hike expectations due to the recent soft patch in UK economic data. Last week for example saw the UK economy suffer a hat-trick of weaker-than-expected PMIs while manufacturing production and construction output came in significantly weaker than expected. Investors must have wondered whether the Bank of England’s recent tilt towards the hawkish side was a bit premature. Given the renewed weakness in data, would they tolerate the rise in inflation by keeping rates on hold for longer? One of investors’ key concerns is the fall in real wages as the pace of inflation sharply exceeded that of nominal wages growth.
The latest UK earnings data was released this morning and unfortunately nominal wages fell again which meant that real incomes declined further. However, the headline 1.8% reading, which was down from 2.1% previously, was bang in line with the expectations. What’s more, earnings excluding bonuses actually rose to 2.0% in the three months to May from 1.8 per cent previously. On top of this, the unemployment rate dropped to a new 42-year low of 4.5% as employment rose by an above-forecast 175,000. Meanwhile jobless claims rose only by 6 thousand applications in June, lower than 10.5 thousand expected. This leading indicator of the jobs market bodes well for employment but says nothing about wages though.
Today's latest jobs and wages data was overall better than expected, which has alleviated some of the concerns about the falls in real wages. But the key question remains: will the Bank of England maintain its recent hawkish rhetoric? I think it will, and I therefore expect to see higher levels for the pound against some of her weaker rivals, including the US dollar.
In fact, the GBP/USD has already bounced off a key support level we highlighted in this week’s Live Trading Session webinar on Monday. The 1.2815 level was the last resistance prior to the breakout on June 28. Once resistance, this level has turned into support, at least for the time being anyway. At the time of this writing, the cable was testing last week’s low and resistance at 1.2865/70 area. Last week, the cable had created an inside bar pattern on its weekly chart following a large rally the week prior. These patterns typically trap traders before the trend resumes in the underlying direction (to give you an idea, see the EUR/GBP’s daily chart and price action since Monday). If this turns out to be an inside bar failure pattern then the GBP/USD could head towards and possibly beyond 1.3000 in due course – perhaps similar to how the EUR/USD cleared its own key level of 1.1300 at the end of June. All that being said however, I would drop my bullish view in the short-term if the cable closes the week below the 1.2815 support level.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.