GBP/USD loses ground on soft employment report

The British pound has extended its losses on Tuesday. In the European session, GBP/USD is trading at 1.2799, down 0.26%.

UK job market slows down

The UK labor market has remained resilient despite elevated interest rates but is showing signs of cracks, based on today’s employment release.

The unemployment rate rose to 3.9% in the three months to January, up from 3.8% in the three months to December and above the market estimate of 3.8%. Wage growth excluding bonuses dropped to 6.1% in the same period, down from 6.2%. Employment growth declined by 21,000, compared to a 72,000 gain in the three months to December and missing the market estimate of a gain of 10,000.

The data shows that the Bank of England’s rate policy, which has slowed economic activity, has dampened the labor market. This is significant as strong employment numbers, in particular wage growth, have driven inflation. If the labor market continues to weaken, there will be more pressure on the BoE to reduce interest rates later in the year.

The markets are widely expecting the BoE to hold rates at next week’s meeting and have fully priced a cut in August. If economic data is weak and inflation continues to drop closer to the 2% target, the BoE could start to lower rates even earlier.

The UK releases GDP on Wednesday. The market estimate for January stands at 0.2% y/y after a 0.1% decline in December. The economy slipped into a recession in the fourth quarter 2023, as GDP contracted by 0.3%, which marked a second straight quarter of negative growth.

GBP/USD technical

• There is resistance at 1.2825 and 1.2855.

• GBP/USD is testing support at 1.2784. Below, there is support at 1.2754.