|

GBP/USD eases from weekly highs above 1.3700 ahead of the NFP

  • GBP/USD retreats highs at 1.3706, but maintains a moderately bid tone on Wednesday
  • Soft US data has offset the negative impact from the UK's political crisis.
  • Investors remain cautious on Wednesday, awaiting the release of US Nonfarm Payrolls data.

The Pound (GBP) has retraced losses against the US Dollar (USD) on Wednesday, but failed to find acceptance at weekly highs above 1.3700 and has pulled back to the 1.3680 area at the time of writing. A weaker USD following Tuesday’s downbeat US economic releases is offsetting the negative impact on the GBP from the UK's political crisis.

Investors, however, remain cautious about placing USD directional bets ahead of the delayed Nonfarm Payrolls report, due later today. Market consensus anticipates a net job growth of 70K in January from 50K in December, with the Unemployment rate steady at 4.4% and wage growth slowing down to a 3.6% yearly growth from 3.8% in December.

The US Dollar fell under pressure on Tuesday as December’s Retail Sales data stalled, with core Sales contracting, suggesting a lower contribution from consumption to Q4 GDP. 

Beyond that, the employment costs cooled down more than expected, posting the slowest annual growth since early 2021. These figures suggest a stalled labour market with contained inflationary pressures, and endorse the market’s view that the US Federal Reserve will cut interest rates more than once this year.

Recent US data has offset the negative impact of a political crisis in the UK that has left Prime Minister Keir Starmer fighting for survival. Recent news reports revealing the connections of the former UK ambassador to the US, Peter Mandelson, with the convicted sex offender Jeffrey Epstein, have caused an earthquake in the cabinet, prompting a string of resignations and putting Starmer’s position on the edge.

Employment FAQs

Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.

Author

Guillermo Alcala

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

More from Guillermo Alcala
Share:

Editor's Picks

AUD/USD bounces off multi-month low, nears 0.6900

AUD/USD edges higher toward 0.6900 in the Asian session on Wednesday, recovering some of the previous day’s losses to its lowest level since March as the US Dollar stalls the hot US CPI-inspired rally amid hopes of a US-Iran peace deal. Meanwhile, hawkish comments from FOMC members have almost confirmed another December rate hike, which favors USD bulls and should cap the Aussie.

USD/JPY remains capped below 159.00 amid looming intervention risks

USD/JPY struggles to build on the previous day’s strong gains to a near one-month top as intervention risk supports the Japanese Yen while hopes of a US-Iran peace deal cap the safe-haven US Dollar. That keeps the pair's upside limited below 159.00, for now.

Gold sticks to gains near $4,050 amid steeper Fed rate hike bets

Gold clings to recovery gains near $4,050 in the European session on Wednesday. However, upside seems limited amid sustained US Dollar demand. Tuesday's hot US inflation figures fuel expectations of a more aggressive policy tightening by the US Federal Reserve (Fed). This helps the Greenback preserve recent strong gains, despite hopes for US-Iran diplomacy.

Bitcoin at risk of sharp moves as leverage builds in derivatives markets

Bitcoin remains in a capped tone, trading around $73,800 after slipping to a low of $72,727 following the previous day’s hot US inflation figures. Institutional demand continues to weaken, with BTC spot Exchange Traded Funds recording a $95 million outflow on Tuesday, marking the fourth straight day of withdrawals. Traders should be cautious as a K33 Research report highlights that BTC is at risk of sharp moves as leverage builds in derivatives markets.

Hot CPI helps cement December Fed hike as Nvidia slumps
October CPI inflation landed yesterday and beat expectations across the board. Note that we only received the MM figures because of last year’s government shutdown. Headline MM came in at 0.4%, beating the 0.3% forecast, though below September's 0.6%. Core MM also came in at 0.3%, slightly higher than the 0.2% estimate and matching the prior month’s reading.
What the US CPI headline doesn’t tell you about inflation

Brent crude has fallen about a third since mid-October on hopes the Iran war is ending, but diesel, freight and fertiliser costs haven't followed. Those costs reach US consumer prices in stages through 2027 and could keep inflation high after gasoline gets cheaper.