Cable Navigates Jobs, Inflation and New PM

Economists anticipate that the new Burnham government will inherit a solid labour market and easing inflation, which will keep the BOE from hiking this year, but traders could still be nervous.

What Might Move Cable This Week

• Markets are focused on who will be the Chancellor after Andy Burnham is slated to become PM on Monday.
• The UK labour market is expected to remain resilient, allowing the BOE to address inflation issues.
• June UK CPI is projected to ease, but markets could focus on renewed uncertainty amid deepening conflict in the Middle East.
• The odds of a BOE hike later this year have risen alongside Brent prices.

Better Data Leaves Markets Focused on Politics

Andy Burnham is expected to be sworn in as the seventh Prime Minister of the decade on Monday, with markets focusing on his new Cabinet. Over the weekend, Labour deputy leader Lucy Powell said that the new government would be "bolder" but would stick to the Manifesto. Some analysts interpreted her comments as signalling that Burnham's Treasury will stick to the established fiscal rules, so some expect a replacement who will keep the current framework intact. Markets are still hoping Rachel Reeves will remain Chancellor, which would likely boost the pound. Britain's return to growth in May, coupled with potentially positive data later in the week, could help make that case and support the market. However, a Chancellor change would likely leave the pound to react to the data later in the week. If someone unexpected is appointed to the top job at the Treasury, the currency could react negatively, overshadowing the reaction to the data.

First up is labour data due on Tuesday, with economists expecting the UK May unemployment rate to remain unchanged at 4.9%. The employment change figure is expected to ease to 70K from 100K in April, while the June claimant count is projected to be lower at 25K, down from 31.2K in May. If expectations are met, it would affirm the narrative of a resilient UK jobs market amid cooling hiring, easing pressure on the BOE. Then on Wednesday, it's the turn of inflation figures, which could be the most important of this week's data releases as the British economy faces upward price pressure from energy costs. Economists anticipate that the headline UK CPI change for June will ease to 2.6% from 2.8% as gasoline prices came down last month. The core rate is also projected to cool to 2.5% from 2.6% a month earlier. However, given Brent's resurgent price amid intensifying fighting over the Strait of Hormuz, markets may look past this data, assuming energy price pressures will rebound later in the year.

Mind the Interest Rate Gap between BOE and Fed, ECB

Markets are still pricing in a near-certainty that the BOE won't raise rates at its meeting at the end of the month. However, the outlook becomes murkier, particularly as the uncertainty around the situation in the Middle East leaves markets generally inclined to raise rate expectations. In the current scenario, the BOE would keep rates unchanged while the Fed hikes, which would support the greenback against sterling and weigh on cable. But if this week's data shows strong beats, the odds of a BOE hike might increase and catch up with the Fed. That would allow the pound to rise against the dollar and even the euro, as the shared economy lags Britain's. However, a disappointment in the numbers could widen the policy odds and weigh on the pound.

Cable Double Bottom Play in Focus After Strong Bounce

The recent spike in the pound to 1.3560 last week might have more legs towards 1.3660, given the bounce off 1.3150 now looks more like a double bottom. Although confirmation won’t arrive before breaking past the neckline at 1.3660, rising to the resistance level produces a zone of ~200 pips. In the long run, the potential formation adds 510 pips to the neckline. However, in the short term, resistance lies at the upper VWAP of 1.3535 and the swing high of 1.3557, with the median line offering support below 1.3400 at 1.3369.

Source: SpreadEx | GBPUSD Daily Chart