Pound Sterling rises as strong wage growth boosts inflation expectations

Pound Sterling delivers a breakout of the consolidation after UK’s ONS reported weak labor market data.
United Kingdom labor market witnessed lay-offs in June and a healthy jump in jobless claims in July.
Britain’s Unemployment Rate rose to a fresh nine-month high at 4.2%.

The Pound Sterling (GBP) delivered a consolidation breakout after the United Kingdom’s Office for National Statistics reported a significant growth in jobless benefits and healthy lay-offs in the labor market. The GBP/USD pair extends its upside as a considerable jump in the labor cost index ensures more interest rate hikes from the Bank of England (BoE) cannot be ruled out. The Unemployment Rate rose to a fresh nine-month high at 4.2%.

United Kingdom’s vulnerable labor market report indicates the consequences of aggressively tight interest rate policy by the BoE. Labor shortages and high food inflation have remained major contributors to persistent inflation and lay-offs in June ensure easing inflationary pressures ahead. After a weak labor market report and healthy growth rate, investors will shift their focus toward the inflation data for July, which will be published on Wednesday at 06:00 GMT.

Daily Digest Market Movers: Pound Sterling remains elevated ahead of inflation data

Pound Sterling jumps above 1.2700 as the United Kingdom labor market data demonstrates the consequences of the aggressive rate-tightening cycle by the Bank of England.
Claimant Count Change for July rose sharply by 29K, higher than the 16.2K jobless claims recorded in June. On the contrary, investors forecasted a decline in the number of claims by 7.3K.
The UK labor market witnessed a decline in payrolls by 66K in June while investors forecasted fresh additions of 75K job seekers. In May, the addition of 102K employees in the workforce was recorded.
Three months to June Unemployment Rate rose to 4.2% vs. the estimates and the former release of 4.0%.
The key catalyst that is going to discomfort BoE policymakers is the significant growth in labor cost data.
April-June quarter Average Earnings excluding bonuses rose to 7.8% vs. a downwardly revised prediction of 7.4%. Earnings data including bonuses jumped significantly to 8.2% in the same period, considerably higher than the consensus of 7.3%.
Assessing the UK jobs report, the UK Minister for Employment, Guy Opperman MP told FXStreet:"Our jobs market continues to show its strength with employment at near record levels and inactivity down by over 300,000 since the pandemic peak. Combined with falling inflation and our package of reforms to remove barriers to work, we are on the right path to drive down household costs and grow our economy."
The BoE might continue tightening interest rates as significant growth in labor cost is sufficient to offset higher jobless claims and lay-offs.
Last week, UK factory activities for June and Q2 Gross Domestic Product (GDP) grew significantly despite the continuation of aggressive policy-tightening by the Bank of England.
Monthly GDP swung from a contraction and grew by 0.5% in June, more than the 0.2% expected. In the January-March quarter, the economy contracted by 0.1%.
Quarterly GDP grew by 0.2% in 2Q, while analysts had forecasted a stagnant performance. The annual growth rate was 0.4%, doubling the consensus and the prior release of 0.2%.
Monthly Industrial Production and Manufacturing Production for June expanded strongly by 1.8% and 2.4% respectively, outperforming expectations by a wide margin.
After the hangover of factory activities and the labor market, investors will shift their focus toward the inflation and Retail Price Index data.
UK inflation is expected to continue its softening spell as the BoE has raised interest rates to 5.25% and further policy tightening is widely anticipated.
US Dollar appeal continues to shine as investors lose confidence in China’s economic growth, concerned about deflation risks due to weak demand and declining exports.
Investors hope that the Federal Reserve (Fed) will keep the interest rate policy unchanged in September as modest growth in the United States inflation is in line with the Fed’s desired rate of 2%.
US Census Bureau reported that Retail Sales data for July expanded at a 0.7% pace vs. expectations of 0.4% and June's reading of 0.2%.

Technical Analysis: Pound Sterling maintains auction above 1.2700

Pound Sterling comes out of the woods and tests the region above the round-level resistance of 1.2700. The Cable delivered a V-shape recovery after printing a fresh six-week low around 1.2600 as investors considered the Pound Sterling a value bet. Medium-term sentiment for the Pound Sterling is still bearish as the Cable is trading below the 20 and 50-day Exponential Moving Averages (EMAs). The asset could be exposed to fresh lows if it fails to sustain above the crucial support of 1.2600.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides the monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect the Pound?

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

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