UK wage growth accelerates to test Bank of England stall theory
An overview of Monday’s performance
The GBP/USD pair rose 0.36% on Monday. Reversing a 0.06% loss from Friday, GBP/USD ended the day at $1.25089. The volatile session saw the pair decline to its lowest level at $1.24631 before rising to its highest level at $1.25480.
UK Labor Market Overview GBP/USD move
The UK Labor Market Overview report attracted significant attention this morning. Last week, Bank of England Governor Andrew Bailey poured cold water on further interest rate hikes by the Bank of England.
The Governor of the Bank of England expects a sharp decline in inflationary pressures before the end of the year, eliminating the need for further interest rate hikes. However, tighter labor market conditions or higher wage growth could test the pause theory.
Tighter labor market conditions lead to an upward trend in wages. Higher wages would fuel consumption and demand-driven inflation. Raising interest rates usually counteracts these effects, weakening labor markets, wage growth, and consumption.
UK wage growth to test the Bank of England’s stalling theory
The UK unemployment rate rose from 4.2% to 4.3% in July. However, wage growth accelerated in July. Average income + bonuses increased by 8.5% in July compared to 8.4% in June. Economists expect the UK unemployment rate to rise from 4.2% to 4.3% and average hourly earnings + bonuses to rise by 8.2%.
Wage growth figures will attract the attention of Monetary Policy Committee members.
The US CPI report looms large on the horizon
Easing market bets on further interest rate hikes by the Federal Reserve continued to weigh on investors’ appetite for the dollar. Investors expect core inflation numbers in the United States to be less severe to support the Federal Reserve in ending the cycle of tightening interest rates.
According to the CME FedWatch tool, the probability of the Fed’s September comment on interest rates was 93% versus 92% on Friday. In contrast, there was a 57.6% chance of a pause in November versus 53.0% on Friday.
The shift in sentiment towards the Fed’s interest rate outlook leaves GBP/USD at risk of a sharp decline.
Hotter-than-expected core inflation numbers in the US could fuel rate hike bets from the Fed. There are no FOMC members on the calendar to speak before the US CPI report. The Federal Open Market Committee entered a blackout period on Saturday. FOMC members refrain from discussing monetary policy during the blackout period.
Short term forecast
Macroeconomic indicators point to a further decline in GBP/USD despite wage growth numbers. However, a shift in sentiment towards the Fed’s interest rate path should provide support for GBP/USD in the near term.
Price movement of the British pound to the US dollar
GBP/USD sat below the trend line. However, the GBP/USD pair remained above the 200-day moving average while remaining below the 50-day moving average. The moving averages sent bearish signals in the near term but bullish in the long term.
A higher UK unemployment rate would mitigate upward forces on wage growth, allowing the Bank of England to rein in interest rate hikes. If GBP/USD breaks below the 200-day moving average, it could approach the $1.24410 support level.
However, rising bets on a Bank of England rate hike to tame inflation should support the 50-day moving average and the $1.26815 resistance level.
The daily 14-period RSI reading of 38.50 shows that the GBP/USD pair could fall to the $1.24410 support level before entering the oversold zone.
GBP/USD remains below its 200-day and 50-day EMA, reaffirming near-term bearish price signals. A breakout of the GBP/USD pair above the 50-day moving average would give the bulls an opportunity to make a move at $1.26 and the 200-day moving average. However, GBP/USD will need a BoE comment to confirm the need to address wage growth to target the 200-day moving average.
The 48.10 RSI on the 4-hours frame on the 14-periods frame shows that GBP/USD could retest the 1.24410 support level before entering the oversold zone.