UK Wage Surge Stirs Inflation Concerns

The British pound gained ground against the US dollar on Tuesday as new data revealed a remarkable surge in British wages during the second quarter, heightening concerns about inflation for the Bank of England. However, this positive momentum was restrained by indications of a cooling labor market.

The sterling's upward trajectory was propelled by the revelation that British basic wages, excluding bonuses, soared by an impressive 7.8% compared to the previous year in the three months leading up to June. This marked the most rapid annual growth rate since the commencement of comparable records in 2001. This surge in wages has become a cause for concern for the Bank of England, as it intensifies worries about a potential inflationary spiral.

Despite the robust wage growth, there were also signs of a downturn in the job market. The unemployment rate in the UK unexpectedly climbed to 4.2%, up from 4.0%, reaching its highest level since the period spanning October 2021. This escalation in unemployment was swifter than anticipated by the Bank of England, prompting speculation about the potential consequences on inflation.

The prevailing sentiment among money market traders is that the Bank of England will institute a 25 basis point increase in interest rates during its upcoming September meeting. There is also a 12% probability that rates could be raised by 50 basis points. The anticipation of these rate hikes is fueled by concerns that the substantial wage growth could trigger secondary effects on inflation, leading to a total of 75 basis points of tightening from the central bank by March of the following year, potentially pushing the bank rate to 6%.

Despite the optimism surrounding wage growth, the broader economic landscape presented a mixed picture. British grocery inflation displayed a gradual decline for the fifth consecutive month in August, accompanied by dampened sales growth due to unfavorable weather conditions. Nevertheless, official data from the previous month indicated that overall inflation in the UK had surged to 7.9%, the highest among major economies, with food inflation reaching a staggering 17.3%. The Bank of England is projecting that food price inflation will recede to around 10% later in the year.

Shifting focus to the US, the dollar index remained relatively steady after US retail sales exhibited a stronger-than-expected increase in July. Despite the Federal Reserve's proactive interest rate hikes to curb inflation, resilient demand supported by substantial wage gains from a tight labor market has contributed to this unexpected growth.

US producer prices also slightly exceeded projections in July, with the cost of services rebounding at its swiftest pace in nearly a year. However, this trend aligns with a moderation in inflationary pressures. This was complemented by unchanged goods prices outside of the food and energy sectors, signaling a transitory disinflation of goods.

Meanwhile, a survey conducted by the University of Michigan indicated a slight dip in US consumer sentiment for August. However, Americans expressed expectations of a gradual decrease in inflation over the upcoming year and beyond. This outlook was reinforced by a survey by the New York Federal Reserve, which highlighted a decrease in projected rates of inflation for various categories, including gasoline, food, medical costs, and rent. As inflationary pressures moderate, it raises questions about the necessity for further interest rate hikes by the US central bank. Hence, it is anticipated that the pound will experience fluctuation within a range, possibly showing a slight weakening against the US dollar.

Data for Technical Analysis (5H) CFD GBP/USD

Resistance : 1.2706, 1.2710, 1.2715

Support : 1.2696, 1.2692, 1.2687                           

5H Outlook

Source: Investing.com    

Buy/Long 1 If the support at the price range 1.2686 - 1.2696 is touched, but the support at 1.2696 cannot be broken, the TP may be set around 1.2708 and the SL around 1.2681, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2706 - 1.2716, TP may be set around 1.2722 and SL around 1.2691, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2706 - 1.2716 is touched, but the resistance 1.2706 cannot be broken, the TP may be set around 1.2694 and the SL around 1.2721, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2686 - 1.2696, TP may be set around 1.2680 and SL around 1.2711, or up to the risk appetite.       

Pivot Points Aug 16, 2023 02:46AM GMT

Sources: Investing 1, Investing 2