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Sterling (GBP) rebounded strongly as bearish sentiment in the market eased, but the broader market remained weak. The GBP/USD currency pair rebounded quickly ahead of the release of the UK’s July jobs report, which is set to shed light on current labor market conditions. Investors will be keenly watching wage growth momentum, which remains the main trigger for inflationary pressures to remain extremely stubborn.
Labor force data released in the UK will show how the Bank of England’s (BoE) restrictive monetary tools perform in a high-inflation environment. Investors will also be watching comments from Bank of England policymakers to see how close interest rates are to peaking. Sluggish wage growth and subdued hiring levels should ease pressure on Bank of England policymakers.
Daily Summary Market Moves: Sterling rebounds ahead of labor market data
Sterling rebounded sharply after holding key support at 1.2450, as the appeal of riskier currencies increased.
The British pound’s July labor market report will be released at 06:00 Beijing time on September 12. The pound rebounded strongly after hitting a three-month low.
The unemployment rate is estimated to rise to 4.3% in the quarter to the end of July, from 4.2% in the previous month. For Bank of England policymakers, rising unemployment will ease pressure from a tight labor market as labor shortages remain a major driver of inflation.
Average earnings (excluding bonuses) for the three months to July were 7.6%, down from 7.8% in the previous period. Bank of England policymakers will welcome slower wage growth as household demand is likely to cool in the future.
Higher wages growth has been a major concern for Bank of England policymakers. Bank of England Governor Andrew Bailey warned last week that the pace of wage growth was not slowing.
UK unemployment claims changed to 17.1k in August, down from 29k in July. The decline in welfare claims suggests employer demand for labor remains good.
Bank of England policymakers will also speak: BoE economist Huw Pill and BoE member Catherine Mann will speak on Monday and Tuesday respectively.
Sterling could come under pressure if BoE policymakers also view current rates as “restrictive enough” or comment that policy tightening is nearing its end (as the BoE’s Bailey and Swati Dhingra said last week) .
Investors are hoping the end of the Bank of England’s rate tightening is not as far away as previously thought. Andrew Bailey commented: “Many indicators are now moving in line with our expectations, indicating that the decline in inflation will continue.”
There are signs of broader weakness in the UK economy, with the labor market cooling and consumer spending momentum slowing, which should cause inflationary pressures to buckle.
Regarding monetary policy in September, the market generally expects the Bank of England to raise interest rates for the 15th consecutive time. A rate hike of 25 basis points (bps) is expected, pushing rates to 5.50%.
The U.S. dollar index (DXY) retreated sharply to around 104.60 after running out of upside momentum hitting a near six-month high near 105.00. The overall market bias remains bullish due to concerns about global economic growth and August inflation data due in July.
Any unexpected rise in inflation data would force Federal Reserve policymakers to leave the door open for further tightening.
The dollar came under pressure on Monday as China’s inflation rate rebounded in nominal terms in August on Saturday, suggesting deflation risks had eased. From a broader perspective, China’s economy remains fragile amid slowdowns in the real estate sector and retail demand.
Technical Analysis: Pound hits two-day high above 1.2500
Sterling hit a fresh two-day high after finding buying interest near three-month lows around 1.2450, testing areas above psychological resistance at 1.2500. GBP attempts to defend key support at the 200-day exponential moving average (EMA), which is seen near 1.2490. The short-term trend is bearish as the 20-day and 50-day exponential moving averages slope downwards, and the momentum oscillator shows strong bearish impulses.
