- Pound Sterling jumps strongly on upbeat UK labor market data, higher wage growth.
- The growth in average earnings was higher than expected, allowing BoE to maintain a hawkish narrative.
- The US inflation data will guide further action in the GBP/USD pair.
The Pound Sterling (GBP) discovers a stellar buying interest in Tuesday’s early European session as the United Kingdom Office for National Statistics (ONS) has reported upbeat employment data for the three months ending December. The labor demand remains upbeat, and Average Earnings rose at a higher pace than the expectations of market participants.
Hiring from UK employers remained strong as business owners are optimistic about the economic outlook due to receding recession fears, easing price pressures, and hopes of rate cuts by the Bank of England (BoE).
While wage growth momentum was higher than market expectations, the pace was slower than readings in the three months ending December. This indicates that progress in the labor cost declining towards the required 2% target level has slowed. It suggests the BoE will be able to maintain an argument in favor of keeping interest rates at their current level for a more extended period. This has boosted the Pound Sterling as higher interest rates tend to attract more foreign inflows.
Investors brace for higher volatility in the GBP/USD pair as the United States Bureau of Labor Statistics (BLS) will report January’s Consumer Price Index (CPI) data on Tuesday. The appeal for the GBP/USD will strengthen if the inflation data remains softer than expected. The US Dollar would face a sell-off as soft inflation data would allow the Fed to adopt a dovish interest rate stance sooner, which will increase foreign outflows
- Pound Sterling witnesses strong buying interest as the United Kingdom ONS has reported upbeat Employment data for three months ending December.
- The Unemployment Rate falls significantly to 3.8% against expectations of 4.0% and the prior reading of 4.2%.
- UK employers recruited 72K workers in December, similar to 73K labor additions in November.
- In January, Claimant Count Change were higher at 14.1K against 5.5K reading in December.
- The reduction in Average Earnings (both with and without bonuses) for three months ending December was slower than expected, which is expected to allow Bank of England policymakers to push back expectations of early rate cuts.
- Average Earnings Excluding Bonus’ grew by 6.2% against expectations of 6.0% and the former release of 6.7% (revised from 6.6%). The economic data including bonuses rose at a higher pace of 5.8% against the consensus of 5.6% but remained slower than the prior reading of 6.7% (revised from 6.5%).
- The outlook for the Pound Sterling remains upbeat as investors hope the BoE will start reducing its benchmark rates after the Federal Reserve (Fed).
- The CME FedWatch tool shows that the Fed will start unwinding its restrictive monetary policy stance in May.
- The current outlook on interest rates by the Fed will be impacted after the release of the United States inflation data for January, which will be published at 13:30 GMT.
- According to the estimates, the headline inflation grew at a slower pace of 3.0% against 3.4% in December. In the same period, core inflation that excludes volatile food and oil prices decelerated slightly to 3.8% from 3.9%.
- Investors anticipate the monthly headline to rise steadily by 0.2% and 0.3% respectively.
- A soft inflation report would raise expectations of an early rate cut by the Fed in January.
Pound Sterling advances vertically to 1.2666 on upbeat labor market data. The GBP/USD pair prints a fresh weekly high. The asset is sustaining comfortably above the 50-day Exponential Moving Average (EMA), which trades around 1.2636. The outlook for the Pound Sterling will strengthen if it manages to sustain above the 20-day EMA, which trades near 1.2660.
The 14-period Relative Strength Index (RSI) rebounds from 40.00, which indicates that market participants have utilized the correction as a buying opportunity. A bullish momentum would emerge if the RSI (14) climbs above 60.00.
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.
