British Pound remains on the defensive as investors await BoE’s decision

GBP/USD bounced up above 1.3300, but remains relatively close to two-month lows in the 1.3260 area.
The Pound showed a mild reaction to the bright UK employment data as traders await the BoE's decision to take positions.
The BoE is expected to leave rates on hold later on the day and hint at a neutral stance.

Guillermo Alcala FXStreet

The British Pound (GBP) trims losses against the US Dollar (USD) on Thursday, but remains near the two-month low hit on Wednesday. The upbeat UK employment figures have failed to boost the Pound's recovery, as investors are reluctant to place large GBP long positions ahead of the Bank of England monetary policy decision, due later in the day.

The UK Unemployment Rate declined unexpectedly to 4.9% in the three months to April, down from 5% in the previous period, according to data released by the Office for National Statistics on Thursday. Net employment increased by 100K in the mentioned period, down from the previous 148K increase, but above the 80K consensus.

Beyond that, wages continued to grow at a strong pace, keeping pressure on inflation. The Average Earnings Excluding Bonus remained steady at 3.4% yearly growth, against expectations of a slowdown to 3.2%, and including bonus, salaries grew at a 4.4% pace, also unchanged from the previous period.

The BoE is expected to stand pat on rates

Later in the day, the Bank of England (BoE) is expected to leave its Bank Rate unchanged at the current 3.75%. Data released on Wednesday revealed that UK inflation steadied in May, and the US-Iran peace deal has raised expectations that the energy shock will gradually unwind, which gives the bank some leeway to maintain its "wait-and-see" stance.

The Federal Reserve (Fed), on the other hand, delivered a rather hawkish hold on Wednesday in the first meeting chaired by Kevin Warsh. The bank left its benchmark rate in the 3.50%-3.75% range and released a shorter statement removing language hinting at an easing bias.

The Fed acknowledged an improvement in economic activity and a stronger labour market, despite the uncertainty stemming from the Middle East conflict. Interest rate projections, the so-called "dot plot", showed that nearly half of the committee members foresee a rate hike before the year's end. US Treasury yields jumped after the event, and the US Dollar appreciated against its main peers.

Economic Indicator

ILO Unemployment Rate (3M)

The ILO Unemployment Rate released by the UK Office for National Statistics is the number of unemployed workers divided by the total civilian labor force. It is a leading indicator for the UK Economy. If the rate goes up, it indicates a lack of expansion within the UK labor market. As a result, a rise leads to a weakening of the UK economy. Generally, a decrease of the figure is seen as bullish for the Pound Sterling (GBP), while an increase is seen as bearish.

Why it matters to traders?

The Unemployment Rate is the broadest indicator of Britain’s labor market. The figure is highlighted by the broad media, beyond the financial sector, giving the publication a more significant impact despite its late publication. It is released around six weeks after the month ends. While the Bank of England is tasked with maintaining price stability, there is a substantial inverse correlation between unemployment and inflation. A higher than expected figure tends to be GBP-bearish.

Economic Indicator

Average Earnings Excluding Bonus (3Mo/Yr)

The Average Earnings Excluding Bonus release is a key short-term indicator of how levels of pay are changing within the UK economy; it is released by the UK Office of National Statistics. It can be seen as a measure of growth in "basic pay". Generally, a positive result is seen as bullish for the Pound Sterling (GBP), whereas a low reading is seen as bearish.

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