Cable Between US NFP and UK Q4 GDP

Following the BOE's decision to keep rates unchanged, investors are sensitive to any data that could change the odds of easing, seeking growth as they diversify away from US assets.

Market-Driving Expectations

• US NFP expected at 70K, potentially showing a modest rebound in the job market that could delay further rate cuts.
• The December US unemployment rate is expected to remain unchanged at 4.4%, undermining the case for further easing.
• The UK economy is projected to accelerate to 0.2% growth in Q4, as the impact of the Budget was less than initially feared.
• BOE is seriously considering a rate cut after trimming its inflation outlook thanks to measures in the Budget, and markets are looking at the data for more clues on timing.

UK vs US: The Most Labour Market Slack

Last week, the BOE kept rates unchanged but left the door open to further cuts amid concerns that the British job market is underperforming and will drag down inflation. Across the Atlantic, there is a similar concern at the Federal Reserve, with dovish FOMC members led by Christopher Waller dissenting in favour of more rate cuts. The difference is that the Fed has a mandate to maintain full employment, while the BOE needs to concern itself only with the effect on inflation. This means US traders are likely to pay closer attention to the NFP figures released on Wednesday, which were delayed from last Friday due to last week's partial government shutdown. Markets are pricing in less than a 20% chance of a rate cut at the next FOMC meeting in March, but that could rise if the NFP figures show significant slack in the market.

The consensus among analysts is that the US added 70K jobs in January, an improvement over the 50K reported in December. However, that is far from the 180K estimated replacement rate. Meanwhile, the unemployment rate is expected to remain unchanged at 4.4%, close to the structural level. Waller, representing Fed doves, has focused on the risk of deterioration in the labour market to justify further cuts. Signs of a recovery in hiring would be an obstacle for rallying more doves to his cause, and that could delay further rate cuts while inflation remains elevated. A strong jobs showing could support the dollar in the near term, but the gains might be short-lived as traders fret that high interest rates will crimp economic growth.

UK GDP Could Support Sterling

The BOE's dovish tone at its last meeting was justified by lowering its CPI projections for this year, arguing that inflation would essentially come down to target next quarter. The Bank said this was partly due to measures announced in last year's Budget. Traders will now be looking for confirmation that the budget discussion did not hurt economic growth as much as anticipated. The UK has routinely outperformed estimates, and a hotter economy could mean the BOE holds off on rate cuts until inflation actually falls below target, rather than trying to preempt a deflationary environment. UK Q4 quarterly GDP growth is projected to accelerate to 0.2% from 0.1% in the last quarter. The faster-growing economy could also continue to attract investors seeking value amid high-tech valuations, which has helped support cable amid geopolitical uncertainty. On the other hand, a faltering economy could increase the likelihood of the BOE cutting before the Fed and weigh on GBPUSD.

Cable Under Inverse H&S Formation?

The pair has marked a bottom for now at 1.3509, but struggled to get through 1.3700. A break of the said level could trigger a breakout above a potential inverse head-and-shoulders neckline and send prices to the measured move projection of 1.3900. However, 1.3732, 1.3750  and the previous peak at 1.3870 might act as resistance levels. On the flip side, failing to move higher after testing the psychological resistance could weigh on the pound, opening the door to 1.3585 if 1.3625 and 1.3580 give way to bears, exposing 1.3500.

Source: SpreadEx | GBPUSD, 4-hour Chart