- Sterling was not terribly pleased with the announcement of stronger wages and jobs figures in Britain, with the pound hitting a 25-week high against the euro and rising against all its G10 peers after wages.
- Data in Britain beat expectations and the country's unemployment rate fell again. This confirms that the labor market is strong enough to ensure that inflation remains high.
- According to trading on currency platforms, the GBP/USD exchange rate rose from 1.1755 and the GBP/USD pair to the 1.2688 resistance level in the following hours after the Office for National Statistics said average income, including bonuses, fell to 5.8% from 6.7%. % year on year in the three months to December.
- But that exceeded expectations with a larger decline to 5.6%, sending the market moving. When bonuses are excluded, the rate is 6.2%, down from 6.7% but higher than the expected 6.0%.
However, the GBP/USD rate quickly fell to the support level of 1.2578 after the US inflation numbers were announced stronger than all expectations, supporting US interest rates to remain high for a longer period.
The results of the economic calendar data confirm that the market believes that these numbers are consistent with interest rates in Britain remaining at their current levels for a longer period. Prospects of a June rate cut at the Bank of England dimmed slightly after the release of wages data, confirming the BoE's suspicions that inflation will be difficult to return to the 2.0% target as a result of strong wage dynamics. Wages will slow to fall and inflationary pressures will ease thanks to a strong labor market, with the unemployment rate estimated at 3.8% by the Office for National Statistics, lower than the 4.0% that markets had expected.
The British central bank said in its February policy update that it expects inflation to fall to the 2.0% target by April but rise again over the remainder of the year and end 2024 near 3.0%. The bank added that it will keep the interest rate at 5.35% for an extended period and that market expectations of an early interest rate cut are far from reality. Three-month growth in the Labor Force Survey for employment slowed to 72,000 in December, from 108,000 in November, but beat the consensus, 50,000. The number of employees on payroll is provisionally expected to rise by 48K month-on-month in January, higher than the expected -18K.
Analysts point out that the labor market in Britain is still in good condition. This is due to two factors:
- First, British companies would rather retain their workforce and wait for conditions to improve – rather than lay off workers in response to temporary economic weakness, and then struggle to rehire workers with sufficient skills once the recovery takes hold.
- Second, after initially responding too late to inflationary pressures in 2021, the Bank of England did not go far in raising interest rates. Credit conditions have been tightened enough to slow demand and lower inflation expectations, thereby reducing nominal wage pressures, but not enough to collapse the economy and cause labor demand to decline.
But what does this mean for the Bank of England?
Markets have retreated from expectations regarding the timing of the first interest rate cuts, and the number of cuts in 2024 as a whole has decreased. Therefore, economists are now approximating the June or August date for the first step.
Expectations of the pound vs the dollar today:
Before announcing the important and influential British inflation numbers, the price of the British pound against the dollar (GBP/USD) stabilizes bearishly around and below the support level of 1.2600, and according to the performance on the daily chart, the movement is towards and below the support level of 1.2600. Support at 1.2550 would be a clear break of the bull flag and start a bearish shift in the trend. During that time period, the bulls will not gain stronger control of the trend without returning around and above the 1.2775 resistance. There is no significant US data today, but there will be a lingering impact from the announcement of the latest US inflation figures.
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