GBP/USD Finds Stability as UK Inflation Exhibits Contraction Signals

The GBP/USD exchange rate remained relatively stable as traders absorbed the latest employment data from the United Kingdom. The data revealed a mixed picture of the UK labor market, with some noteworthy developments.

The UK's unemployment rate increased from 4.2% to 4.3% in the three months leading up to July. This rise marked the highest unemployment rate since the period ending in September 2021, indicating a cooling trend in the labor market. However, despite this increase in unemployment, wage growth remained robust.

In fact, wages excluding bonuses surged by 7.8% year-on-year in the same three-month period, representing the fastest growth rate since records began in 2001. This substantial wage growth adds further pressure on the Bank of England (BOE) to tighten its monetary policy.

Most market participants anticipate that these developments will lead to another interest rate hike by the BOE on September 22, with the interest rate potentially rising from 5.25% to 5.5%. This move is part of the central bank's strategy to combat inflation, which is currently the highest among major advanced economies.

Despite the positive wage growth and the expectation of further rate hikes, there were still cautionary signs within the labor market data. Alongside the rise in unemployment, the number of employed individuals dropped significantly, with London experiencing its most significant employment decline since October 2020. Moreover, the number of employed individuals aged 16-24 decreased substantially, marking the second-largest such drop on record.

The impact of these economic developments on the currency market was observed as the pound sterling slightly weakened against the US dollar following the release of the data. While wage growth remained strong, it is essential to note that real wage levels have not improved significantly over the past 15 years, despite the recent increases.

Shifting to the US dollar, it experienced a modest uptick in early European trading. This reversal followed significant losses in the previous session as traders adjusted their positions in anticipation of upcoming US consumer inflation data. The focus of the foreign exchange market this week is on this data release, as it is expected to influence the Federal Reserve's decisions in its upcoming meeting. While the Fed is widely expected to keep rates steady in September, persistent inflationary pressures could lead to rate hikes later in the year.

Furthermore, the US Census Bureau released data showing that inflation-adjusted income declined, and a key poverty measure rose sharply in the United States in the previous year. This outcome was largely attributed to the impact of the COVID-19 pandemic and the government's response to it. Child poverty rates more than doubled after the expiration of pandemic-related child tax credits, and household spending power was undermined by the highest inflation rate in 40 years.

In conclusion, the UK's labor market displayed a mix of positive and negative indicators, with strong wage growth potentially driving further interest rate hikes by the Bank of England. Meanwhile, the US also grapples with income disparities and economic challenges resulting from the ongoing pandemic. Consequently, the currency pair's trading pattern is likely to stay relatively steady, with the US dollar potentially experiencing a modest uptick due to the minimal disparity in the performance of both currencies.

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

Resistance : 1.2497, 1.2502, 1.2510

Support : 1.2481, 1.2476, 1.2468                    

5H Outlook

Source: Investing.com            

Buy/Long 1 If the support at the price range 1.2471 - 1.2481 is touched, but the support at 1.2481 cannot be broken, the TP may be set around 1.2497 and the SL around 1.2466, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2497 - 1.2507, TP may be set around 1.2515 and SL around 1.2476, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2497 - 1.2507 is touched, but the resistance 1.2497 cannot be broken, the TP may be set around 1.2476 and the SL around 1.2512, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2471 - 1.2481, TP may be set around 1.2458 and SL around 1.2502, or up to the risk appetite.       

Pivot Points Sep 13, 2023 03:22AM GMT

Sources: Investing 1, Investing 2