The pound underwent a decline despite positive labor market figures released on Tuesday. It dropped from a morning high of slightly above 1.3450 in London to a low of just over 1.3350 in New York. This movement pierced through the converging 50-day and 200-day exponential moving averages near 1.3400. By late trading, GBP/USD was around 1.3380, marking the weakest performance among major currencies for the day. This also represented its fourth consecutive day of decline, falling below both long-term averages for the first time since the rally started in mid-July. More than a third of the recovery from the summer low near 1.3150 has vanished.
One important number went in the wrong direction.
On the surface, the labor market report suggested continued support for the pound. Employee numbers rose by 147,000 over the three months to May, surpassing the previous figure of 100,000. June saw only a 67,000 increase in applicants, contrasting with the expected 28,000, and the unemployment rate dipped to 4.9%, below the anticipated 5%. However, there was a notable downturn in the pay stats; average earnings including bonuses slowed to 4.3%, falling short of the 4.5% forecast, further extending the cooling trend the Bank of England had been anticipating for some time.
Wages are pivotal for the Monetary Policy Committee, and as such, the rest of the report was dismissed as background noise. The central bank maintained its policy rate at 3.75% in June, with two dissenters favoring a rise to 4.00%. Initially, the outlook included nearly three rate hikes, now refocused down to just one rise to 4.00% in the upcoming months. Each cooling trend in wages chips away at the remaining premium that has largely supported the pound amidst a strong dollar.
Same old dollar as new prime minister
The situation remains unclear politically as Andy Burnham steps into his new role at Downing Street; markets are still awaiting the cabinet lineup and financial outlines that will characterize his government. This uncertainty adds a layer of skepticism regarding UK assets, which has been a growing concern since June. A currency that has already adjusted its interest rate premiums has limited patience for ongoing budgetary ambiguity. Particularly, the currency market seems to favor gold, which offers the highest long-term interest rates among G7 nations, while maintaining a relatively low overall debt burden.
Meanwhile, the dollar is riding a war premium that the pound cannot replicate. Tensions regarding Iran continue amid proposals for a cease-fire along with talks about escalating conflict, which keeps Treasury yields synchronized with safe-haven demand. With a Fed rate hike likely priced in by December, and another meeting set for just a week away, the dynamics are heavily in favor of the dollar while the UK side finds itself in a vulnerable position.
Inflation print for premium
The consumer price index set for release on Wednesday is crucial this week. Expectations are that headline inflation might drop to 2.7% year-on-year from 2.8% in June, with core inflation falling to 2.5% and a month-on-month change of 0.1%. The slowdown in wage growth will likely weigh on the market, potentially leading further to downward adjustments in interest rate expectations. However, a surprising upside could empower more hawkish voices and provide the pound with a genuine reason to rebound after a tough week.
On Friday, all remaining risks will converge in one day. The consensus anticipates a -0.2% month-on-month change in June’s retail sales following a 1.2% rise in May. Meanwhile, the preliminary report for July’s Purchasing Managers Business Index indicates a service industry index at 48.8 and a composite index at 49.3, both indices indicating contraction. Consumer confidence slightly improved to -21, which is the only sentiment indicator available during this period. Currencies below their long-term averages need data to justify movements, but the consensus for this week appears largely contrary.
Remarkable technical level
Resistance is found just below the combined 50-day and 200-day EMAs at 1.3400, with a rejection high just above 1.3450 from Tuesday and a July peak around 1.3550.
Support levels include the session low just above 1.3350, followed by 1.3300, with the summer low sitting near 1.3150.
The outlook remains bearish. With both long-term averages declining for the fourth consecutive day and inflation expected to ease soon, the next target could be 1.3300. Yet, a recovery can only be expected if daily close levels surpass 1.3400.
