The pound temporarily jumped against the euro and the US dollar after stronger-than-expected British wages data. The gains quickly faded amid signs of rising unemployment that the Bank of England may be able to temporarily halt its rate hike cycle in the last quarter of the year. During yesterday's session, the GBP/USD currency pair could not cross the 1.2530 resistance level, where the selling pressure is still in place with the change in the direction of the Bank of England's policy, and returned to stabilize downwards around the 1.2460 support level, near its lowest level in three months.
According to official figures, the annual growth in the average total wages of employees (including bonuses) in Britain reached a new record level of 8.5% in the period from May to July 2023, as reported by the Office for National Statistics. This is a figure that exceeds the agreed expectations of growth by 8.2% and represents an increase from the percentage adjusted by the increase of 8.4%. for the three months until June. Immediately after the data, the yields of the British pound and bonds rose, indicating that the market raised expectations about the range of additional interest rates that are still required to reduce inflation in Britain.
The Bank of England will be particularly concerned about the emergence of a wage-price spiral, where wages lead to higher prices charged by businesses which in turn lead to further wage increases, ensuring inflation remains well above the bank's 2.0% target. Commenting on the performance of sterling after the data, Rafi Boyadjian, chief investment analyst at XM.com, says: "The sterling ignores the hot wage growth data." And "even the best performing star in 2023 - the pound sterling - couldn't put up much of a fight against the dollar in this latest round as the Bank of England hinted that UK interest rates are nearing a peak".
The inability of the pound to maintain the highest levels can be explained by the retrospective nature of the wage data, as the Office for National Statistics reported a large one-time increase in the wages of public sector workers (especially the NHS). Annual wage growth (which excludes bonus payments) was 7.8% in July, which was unchanged in June and in line with consensus. Finally, the country's unemployment rate rose to 4.3% in July, the National Bureau of Statistics said, up from 4.2%, in a sign of the steady easing in the labor market that suggests the trend of higher wage increases is unlikely to continue.
The Bank of England – which signaled last week that the end of the interest rate hike cycle was near – will also take into account that unemployment fell by 207,000 in the three months to July. This was a jump from the previous reading of -66,000 and the expected decrease of 185,000. The initial rise in sterling in response to key wages figures looks at risk of fading based on details elsewhere in the report.
The Bank of England is expected to raise interest rates by a quarter of a percentage point on September 21. After 14 consecutive increases in the strongest tightening cycle in decades, this could be the last, according to economists and market bettors. Recent policy guidance suggests the vote could be close this month. Instead of the fears about inflation before August, the monetary policy committee's fears about the recession are increasing. Five of the nine committee members hinted that interest rates at the 5.25% level are high enough, or almost at that level.
Today's sterling vs. dollar expectations:
- Prior to the announcement of the British economic growth figures and the American inflation figures, which will strongly affect the trades.
- The price of the sterling currency pair against the US dollar GBP/USD stabilized on its downward path and the stability will remain below the 1.2500 support level.
- The supporting the control of the bears and the currency pair will be prepared to move towards stronger support levels.
- The closest ones are currently 1.2420 and 1.2350 respectively, which is enough to push all the technical indicators towards strong sell saturation levels.
According to the performance in today's chart, there will be no first break to the current bearish sterling dollar trend without moving towards the resistance level 1.2750. This prepares the bulls to move towards the level of psychological resistance 1.3000. I still prefer to sell the currency pair from each upward level.
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