UK Employment Preview: Good news could be bad news for the BoE

The United Kingdom (UK) will publish its monthly employment report on Tuesday, August 15, and financial markets are anticipating some good news. The announcement will be made 24 hours ahead of the July Consumer Price Index (CPI), which means both releases could define the Bank of England's (BoE) next steps.

Shedding light on future BoE’s decisions

The BoE was the first central bank that understood and said out loud that the economy would likely face a recession amid monetary tightening to fight inflation. Still, the central bank’s current rate stands at 5.25%, pretty much matching the Federal Reserve (Fed) and among the highest rates between major economies.  At its latest meeting, the Monetary Policy Committee (MPC) voted for a 25 basis points (bps) hike and ruled out the likelihood of a recession while clarifying their decision mainly as a result of wage growth.

Average Hourly Earning Excluding Bonus are expected to have risen by 7.4% in the three months to June, higher than the 7.3% previous. Including bonuses, average hourly earnings are foreseen at 7.3% in the same period, up from 6.9% in the prior reading. At the same time, the ILO Unemployment Rate is foreseen steady at 4%, while financial markets anticipate the Claimant Count Change for July will be down by 15K, following an increase of 25.7K in June.  

Bottom line, the labor market is expected to remain tight while inflationary pressures are seen increasing. In the meantime, the UK economy lacks impulse, and so does the Pound.

At the same time, the UK CPI inflation rate stood in June at 7.9% YoY, outpacing wage growth, and is foreseen at  6.8% over the year to July.

The anticipated figures for employment and inflation mean the Bank of England would need to stay on the tightening path, which in the end, fuels the odds of a steep economic setback.

The British Pound could benefit from easing wage growth and from an uptick in the Unemployment Rate, while the opposite scenario could boost speculation of higher rates and hence, a higher risk for a recession.

GBP/USD technical outlook

From a technical perspective, GBP/USD seems on the brink of a bearish breakout. The daily chart shows a Head&Shoulders formation, with the neckline standing at around 1.2600. The top of the figure is July's monthly high at 1.3140, roughly 540 pips above the mentioned neck and the extent of the potential slump once the latter is pierced. It is worth adding that the second shoulder is higher than the first one, usually strengthening the formation.

Additionally, the same chart shows that the 20 Simple Moving Average (SMA) has accelerated north well above the current level as GBP/USD approaches a mildly bullish 100 SMA, providing dynamic support at 1.2610, further reinforcing the critical support area. At the same time, technical indicators turned sharply lower within negative levels, although still far from oversold readings, leaving plenty of room for a downward extension.