Despite some concerning political and economic news from Britain, the Pound US Dollar exchange rate has climbed since Tuesday due to broad technical weakness in the US Dollar. The pair’s movement could be influenced by upcoming US inflation data however.
GBP USD began the week trending at the level of 1.3190 and plunged to a low of 1.3066 on Monday. The pair briefly touched near the week’s opening levels on Wednesday morning, but trended nearer to 1.3150 at the time of writing.
Pound (GBP) Outlook Dented Further as UK Employment Falls
Despite a poor performance against most currencies on Monday and Tuesday, the Pound advanced against the US Dollar yesterday and briefly continued to climb on Wednesday morning.
But this morning, a mixed UK job market data from September, as well as jobless claims stats from October, were published.
Initially, investors were pleased by the news that average earnings including wages had beaten 2.1% expectations and had come in at 2.2%. The figure excluding wages remained at 2.2% as expected.
As further observations came out of the report however, markets became concerned that UK employment had actually dropped – for the first time in almost a year.
The first drop of employment since August-October 2016 and the biggest drop since April-June 2015 marked the end of an employment trend that was keeping analysts hopeful that Britain’s economy was more resilient than expected following the Brexit vote.
This news coupled with wages still trailing behind inflation may also have sparked speculation that the Bank of England (BoE) jumped the gun on hiking the UK interest rate in its November policy meeting.
While the unemployment rate did remain at 4.3% as expected, this was due to a rise in inactivity. In the three months to September, the number of people actively participating in the job market in UK dropped at the fastest rate in almost eight years. The inactive rate now rests at around 21.6%.
With investors now more concerned about the UK job market overall, bets of further tightening action from the Bank of England in the foreseeable future have faded.
The Pound could find some support on Thursday if October’s UK retail sales results beat expectations, but if retail data remains weak it will indicate that the pay squeeze is having a notable effect on consumer activity.
Sterling traders are more likely to await domestic political developments or Brexit news for reasons to buy the weak British currency again.
US Dollar (USD) Weighed by Bearish Market
Investors have been hesitant to buy the US Dollar in recent sessions, as they await more details on US inflation and the US Republican Party’s plans for tax reform.
The US Dollar has been held back by market concerns that major parts of the GOP’s tax plans could be scaled back or delayed. Last week, the Senate tax plan indicated that corporate tax cut implementation could be delayed to as late as 2019.
However, it seems the primary reason for the US Dollar’s broad weakness on Tuesday was simply technical bearishness trading in the market.
‘Greenback’ investors are also anxious ahead of a key data session, with US Consumer Price Index (CPI) stats due to be published during Wednesday’s American session.
With a December Federal Reserve interest rate hike now essentially priced in by markets, worse-than-expected US inflation stats could destabilise the US Dollar outlook.
If US inflation is much worse than expected for example, it could worsen concerns that underlying inflation trends in the US are weak. This could lead to a drop in Fed rate hike bets and a weaker US Dollar.
On the other hand, if US inflation comes in at 2% year-on-year and 0.1% month-on-month as forecast, the US outlook is likely to be unchanged.
US retail stats will also be published, but if inflation is reassuring then USD investors are more likely to look ahead to developments in US tax reform.
GBP USD Interbank Rate
At the time of writing this article, the Pound US Dollar exchange rate trended in the region of 1.3160. The US Dollar to Pound exchange rate traded at around 0.7600.
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