- Britain is expected to report upbeat labor market figures.
- The effect of UK data on GBP/USD tends to be short-lived.
- Brexit, China's woes and the Fed's policies all back a downtrend in cable.
- The selling opportunity may come before the event, due to front-running.
How will UK job figures impact GBP/USD? I think they will likely come out better than expected, as Britain's labor market remains strong despite the cost-of-living crisis. Moreover, the unemployment rate and wage data are for March, when the war in Ukraine was just at its start.
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Why the pound could get a boost
The only figure that could have a negative effect on sterling is Claimant Count Change, which is for April. The indicator reflects jobless claims, which are projected to drop by 38,800, which is already a more modest improvement than the fall of 46,900 in March. If the Claimant Count Change comes out significantly worse than expected – such as a positive figure representing more people claiming unemployment benefits – the pound could suffer.
Source: FXStreet
My base case is that the report will continue showing a healthy labor market, and that could trigger some GBP/USD buying. If Brits have jobs that pay them more money than beforehand, inflationary pressures will rise and the Bank of England will raise interest rates more than planned.
Why any rally is a selling opportunity
However, the response to UK labor figures tends to be short-lived and the overall trend reasserts itself. In this case, GBP/USD remains in a clear downtrend for several reasons.
The UK is at loggerheads with the EU over the Northern Irish protocol, an issue that has intensified after the recent elections to the parliament in Belfast. Higher UK prices are already causing the Bank of England to moderate the path of rate hikes
On the other side of the pond, the US dollar is benefiting from two factors: safe-haven flows and the Federal Reserve's aggressive monetary tightening.
Weak Chinese industrial output and retail sales figures have intensified worries that the world's second-largest economy is dragging global growth down – and that has caused investors to flock to the dollar.
The latest inflation figures from America have also added to the notion that several quick rate hikes are on the agenda, making the greenback even more attractive.
GBP/USD has critical support at 1.2155, the fresh 2022 low. That is preceded by 1.2220. Strong resistance is at 1.2310. Momentum on the 4h-chart is to the downside and the RSI is between 30 and 50 – indicating more falls.
Final thoughts
All in all, UK job figures may boost GBP/USD temporarily, but fail to trigger a more-pronounced upside turn for the currency pair. It is essential to note that in the UK, traders often bet on the direction of the data ahead of time. GBP/USD could rise ahead of the event only to be sold off immediately after the release. That means that the selling opportunity on cable could come even before the publication on Tuesday at 6:00 GMT.
This post is a response from FXS analyst Yohay Elam to a question from a user. Take advantage of your Premium membership and use the Ask Our Analysts button to access our experts.
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