- The Pound Sterling strengthens following UK labor market data for the three months ending in October, which revealed strong wage growth.
- The UK’s jobless rate held steady at 4.3%, as expected, with 173K new workers added to the labor force.
- Investors anticipate that the Bank of England (BoE) will keep interest rates unchanged, while the Federal Reserve is expected to announce a rate cut this week.
The Pound Sterling (GBP) surged against its major peers on Tuesday following the release of UK labor market data for the three months ending in October. The British currency gained strength as Average Earnings Excluding Bonuses, a key measure of wage growth, rose by 5.2%, surpassing the 5% estimate and accelerating from the previous 4.9% increase.
Bank of England (BoE) officials closely monitor wage growth data when setting interest rates, as it plays a significant role in driving inflationary pressures, particularly within the UK service sector.
Additionally, Average Earnings Including Bonuses also grew by 5.2%, exceeding expectations of 4.6% and the previous reading of 4.4%.
While other components of the labor data, such as the addition of 173K new workers (lower than the previous release of 253K), were less favorable for the GBP, the strong wage growth overshadowed these figures. The ILO Unemployment Rate remained steady at 4.3%, in line with estimates.
The robust wage growth suggests that UK service sector inflation could remain elevated, with fresh inflation data set to be released on Wednesday. The core Consumer Price Index (CPI), which excludes volatile items, is expected to have risen by 3.6%, up from 3.3% in October.
Such an outcome would further solidify market expectations that the BoE will leave interest rates unchanged at 4.75% during its monetary policy announcement on Thursday.
Daily Digest Market Movers: Pound Sterling Influenced by UK Inflation Data and Fed-BoE Policy Meetings
- The Pound Sterling edges higher towards the key resistance level of 1.2700 against the US Dollar (USD) in Tuesday's North American session. GBP/USD rises as the USD weakens, with the US Dollar Index (DXY) hovering near a nearly three-week high around 107.00 ahead of the Federal Reserve’s (Fed) policy announcement on Wednesday.
- According to the CME FedWatch tool, traders expect a 25 basis point rate cut, bringing the Fed's key borrowing rate to 4.25%-4.50%. Investors will closely monitor comments from Fed Chair Jerome Powell and the dot plot for fresh guidance on future interest rate moves.
- Market participants anticipate that the Fed will shift from a "dovish" to a "slightly hawkish" stance, based on expectations that inflation risks are rising while employment concerns have eased, according to a recent Bloomberg survey.
- The Flash US S&P Global PMI report for December showed a slight rise in employment, with manufacturing and service sectors both seeing job gains for the first time in months.
- In Tuesday's session, investors will focus on the US Retail Sales data for November, set to be released at 13:30 GMT. The data, a key indicator of consumer spending, is expected to show a growth of 0.5%, up from the previous 0.4% increase.
Technical Analysis: Pound Sterling Holds Steady Near 20-Day EMA
The Pound Sterling continues to trade near the 20-day Exponential Moving Average (EMA) around 1.2815 against the US Dollar (USD). The GBP/USD pair bounced higher after finding support near the upward-sloping trendline around 1.2600, which is drawn from the October 2023 low of approximately 1.2035.
The 14-day Relative Strength Index (RSI) remains within the 40.00-60.00 range, indicating a sideways market trend.
On the downside, the pair is expected to find support near the psychological level of 1.2500. On the upside, key resistance is seen at the 200-day EMA near 1.2710.
