Pound Sterling strengthens on upbeat UK wage, soft US Inflation data

Pound Sterling rose close to 1.2300 despite signs of a loosening UK labor market.
UK employers shed jobs for straight three months, but earnings rose by more than expected.
Investors await US/UK inflation data and commentaries from BoE policymakers.

The Pound Sterling (GBP) extended its upside on Tuesday after mixed UK labor market data, which pointed to wages rising faster than expected but also to lower employment levels. UK employers shed jobs in three months to September, posting a third straight decline in employment as firms reduce costs amid the decline in new business. The Unemployment Rate remained unchanged at 4.2%, while wage growth outperformed expectations.

Soft US Inflation report for October has contributed significantly to the rally in the GBP/USD pair. The US headline inflation softened at a higher pace than expected due to a sharp fall in global oil prices amid easing Middle East tensions.

The rally in the GBP/USD pair stretches despite weak UK labor market data, which indicates that soft employment conditions were already discounted by the market participants. Meanwhile, investors will shift focus on the inflation data for October, which will be released on Wednesday. Inflation data is expected to provide fresh cues about the likely action by the BoE in its last monetary policy meeting of 2023.

Meanwhile, BoE policymaker Swati Dhingra said that higher food price pressures due to geopolitical issues have added to the cost of living crisis.

The commentary from BoE Chief Economist Huw Pill seems more forward-looking. Pill cited that further policy tightening is not needed to tame inflationary pressures but the BoE is prepared if needed. He further added that the BoE must focus on inflation, not tackling other issues in the UK economy.

Daily Digest Market Movers: Pound Sterling capitalizes on soft US inflation data

Pound Sterling jumps to near the crucial resistance of 1.2300 despite loosening labor market conditions in the UK economy.
Employment fell by 207K in the three months to September, a bigger decline than the 198K expected and the former decrease of 82K. The UK workforce has witnessed a drawdown for the third time in a row.
UK firms cut significantly on workforce as new demand has declined due to lower spending by households. Demand from overseas markets has also dropped due to geopolitical tensions.
In the same period, the Unemployment Rate remained steady at 4.2%. Economists had projected the jobless rate rising to 4.3%.
Individuals claiming jobless benefits for the first time rose to 17.8K in October, exceeding the 15K expected and 9K reading from September.
Average Earnings excluding bonuses rose by 7.7% in the quarter-to-September period as expected, easing slightly from the former reading of 7.9%. However, wage growth including bonuses grew at a stronger pace of 7.9% against expectations of 7.4%. In the former period, earnings expanded by 8.2%.
Strong wage growth in the UK economy has been a major contributor to stubborn price pressures. Stubborn UK wage growth is likely to lift consumer inflation expectations.
In spite of persistent wage growth, a majority of Bank of England (BoE) policymakers are expected to support keeping interest rates unchanged or discuss early rate cuts due to weakening labor demand.
The decrease in employment signals a slowdown in the UK economy.
After UK labor market data, investors will shift focus on the commentaries from BoE policymakers: Swati Dhingra and Huw Pill, who are expected to advocate for relief in the tight monetary policy narrative to ease fears of a potential recession.
Going forward, UK inflation data for October will be keenly watched on Wednesday. The annual headline and core inflation are expected to soften significantly to 4.8% and 5.8%, respectively.
Soft consensus for UK inflation suggests that UK Prime Minister Rishi Sunak could fulfill his promise of halving inflation to 5.4% by the year-end. Sunak promised to halve inflation in January when price growth was near 10.7%.
Meanwhile, the US Dollar Index (DXY) plummeted to near 104.80 as the US inflation data for October turned out softer than expected.
Monthly headline inflation remained stagnant on downbeat global oil prices due to insignificant escalation in Middle East tensions. The monthly core CPI grew by 0.2%, slower than expectations and the former reading of 0.3%.

Technical Analysis: Pound Sterling rallies close to 1.2400

Pound Sterling climbed to near 1.2400 after investors ignored weaker-than-anticipated UK labor market data. The GBP/USD pair recovered after testing the support region near 1.2200, where a breakout of the symmetrical triangle chart pattern took place.

The 20-day Exponential Moving Average (EMA), which trades around 1.2230, offered support to the Pound Sterling bulls, which later pushed it to near the 50-day EMA. The broader appeal for the Cable is still bearish as the 200-day EMA is sloping south.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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