According to the recent movement of the GBP/USD currency pair, there is a clear struggle between bears and bulls. This was evident after the currency pair retreated to the support level 1.2353, then bounced upward towards the resistance level 1.2450, and settling around 1.2425 at the time of writing the analysis.
The very hot wage data will continue to pressure the Bank of England to raise interest rates further, which could ensure continued support for the pound. Yesterday's data, the pound rose against the euro and the dollar, as it was revealed that key wages (including bonuses) rose 5.9% in the December-February period.
This was unchanged from an upwardly revised reading of 5.9% for February and well above consensus expectations of 5.1%.
The BoE would have wanted to see a clear deceleration in wages if it was satisfied that domestic inflationary pressures were easing. The result will give credence to expectations of a 25 basis point rate hike at the Bank's Monetary Policy Committee meeting in May. Higher wages increased employment in the three months to February by 169k, which was more than the 50k the market had expected. It is also a significant increase in employment compared to January's reading of 65K.
However, the UK unemployment rate unexpectedly rose to 3.8% from 3.7%. This development will be welcomed by British Chancellor Jeremy Hunt, who has been keen to increase workplace participation that has contracted in the wake of the Covid pandemic. Thus, an increase in the labor supply could provide a welcome boost to the economy and help challenge consensus predictions that the UK will be the worst performer of the world's advanced economies this year.
The real positive story for sterling might be the increase in the participation rate.
Looking ahead, the next major data release for the GBP is in the middle of the week with the release of March inflation figures. A higher-than-expected rate of inflation could boost the pound, however, there is also a risk that a significant rally could raise concerns about the economic outlook.
In fact, what could be more important for sterling than here is how real income, i.e. wages minus inflation, performs. All in all, the British pound faces a data-packed week that will set the tone for the Bank of England's interest rate decision for May, with labor market and inflation data dominating the agenda ahead of retail sales on Friday. Sterling will be less sensitive to retail sales, although a significant deviation from expectations could still trigger a move before the weekend.
Sterling forecast against the dollar today:
- The general trend of the GBP/USD currency pair is still bullish.
- Stability around and above the resistance 1.2460 confirms this and gives the bulls the opportunity to move for more.
- If this happens, the resistance levels 1.2530 and 1.2600 will be the next targets.
- This requires more positive sentiments for investors in the financial markets and more signals for the future tightening of the Bank of England's policy. British inflation figures will have an impact on that policy.
On the other hand, and for the same period of time, breaking the sterling / dollar pair at the support level of 1.2330 will give the bears a strong impetus to move. An actual reversal of the trend will not occur without moving towards the support level of 1.2200.
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