- The Pound Sterling tumbles as hot US inflation data dampens market sentiment.
- UK Employment data for the three months ending January indicates weak labor demand and slower wage growth.
- Cooling UK labor market conditions lift up BoE rate cut hopes.
In the early American session on Tuesday, the Pound Sterling (GBP) experienced a sharp sell-off following reports from both the United States Bureau of Labor Statistics (BLS) and the United Kingdom Office for National Statistics (ONS).
In the US, the monthly headline inflation matched expectations, increasing by 0.4% compared to a 0.3% rise in January. Similarly, core inflation, which excludes volatile food and energy prices, also rose by 0.4%, in line with investor expectations. However, the annual figures revealed a faster acceleration in headline CPI to 3.2% from both expectations and the previous reading of 3.1%, while core inflation slightly decelerated to 3.8% from 3.9% in January. Market forecasts had anticipated a more significant softening in underlying inflation data to 3.7%.
Meanwhile, data from the UK ONS indicated that higher interest rates from the Bank of England (BoE) and the deepening cost-of-living crisis are beginning to impact labor market conditions. The UK’s Unemployment Rate climbed to 3.9%, with employers shedding 21,000 workers and Average Earnings growing at a slower pace in the three months ending January. These labor market indicators underscore the uncertainty surrounding the economic outlook, which may prompt BoE policymakers to consider initiating interest rate cuts sooner than previously anticipated.
Daily digest market movers: Pound Sterling drops sharply while US Dollar soars
The Pound Sterling saw a sharp decline following the release of softer-than-expected Employment data by the United Kingdom’s Office for National Statistics (ONS) for the three months ending in January.
The Unemployment Rate climbed to 3.9%, surpassing both expectations and the prior reading of 3.8%. UK employers reduced their workforce by 21,000 employees, in contrast to the hiring of 72,000 job-seekers in the preceding three months ending in December. In February, the Claimant Count Change saw a modest increase of 16.8K, falling short of expectations of 20.3K. Additionally, the number of individuals claiming jobless benefits in January was revised downward to 3.1K from the previously reported 14.1K.
Average Earnings Excluding Bonuses grew by 6.1%, slightly lower than both expectations and the previous reading of 6.2%. Earnings including bonuses also experienced a slower growth rate of 5.6%, below the consensus of 5.7% and the prior reading of 5.8%.
The deceleration in Average Earnings, both with and without bonuses, for the three months ending in January exceeded market expectations. This slower wage growth is anticipated to prompt Bank of England policymakers to contemplate rate cuts earlier than previously envisaged.
In contrast, on Monday, BoE policymaker Catherine Mann cautioned that achieving sustainable inflation at the desired target of 2% would require substantial effort. Mann was one of the two policymakers who advocated for a rate hike in the February monetary policy meeting.
This week, investor attention will remain on the Pound Sterling as focus shifts to the release of UK monthly Gross Domestic Product (GDP) and factory data for January, scheduled for Wednesday.
Technical Analysis: Pound Sterling drops to 1.2760
The Pound Sterling slips below the psychological support level of 1.2800 against the US Dollar following disappointing UK labor market data. Despite this setback, the short-term outlook for GBP/USD remains positive, with the 20-day Exponential Moving Average (EMA) at 1.2720 trending upwards. The pair has retraced from its recent peak of 1.2894, nearing a horizontal support level derived from the high on August 10, positioned at 1.2819.
Although the 14-period Relative Strength Index (RSI) has slightly decreased from its recent peak of 71.33, indicating a minor downturn, the overall momentum remains bullish.
