UK Jobs and GDP to Move GBPUSD

The UK economy shows ongoing signs of expansion against expectations, leaving the BOE lagging behind other central banks.

Positive News for the Pound?

The pound is trading close to its highest level against the dollar since early 2022, primarily due to the British economy proving more resilient than expected. Employment levels are stronger than forecast in the context of an economy outperforming the rest of Europe, placing the BOE in a difficult position if it wishes to ease monetary policy further. While the economy is expected to slow in the second half of the year, this has not materialised so far, leaving upcoming UK economic data this week to confirm this trend.

Sustained labour market strength is a key factor preventing the BOE from committing to a steeper cut in interest rates. The bank feels inflation is moving in the right direction but is wary of a rebound from a shock in the labour market due on Tuesday, which should show unemployment holding steady at 4.2% in July. Some easing of job market tightness is anticipated as average earnings growth likely slowed slightly to 4.2% from 4.5%. However, new claims for unemployment benefits in August are projected to return to a more normal 21,000, down from an unusually high 135,000 in July.​

Plenty of Headroom

The labour market appears to be loosening slowly. BOE Governor Andrew Bailey had changed his tone from earlier in the summer when he said markets were accurately pricing in further rate cuts. Economists now only expect one more rate cut this year, keeping the Bank behind the Federal Reserve and ECB, both of which are forecast to cut rates three times over the same period.

A growing economy can cause tightness in the labour market while relieving pressure on the central bank to start cutting rates. The resilience of the UK economy may provide scope for the BOE to keep rates higher than its counterparts. This could strengthen the pound over the coming months. On Wednesday, the UK will also report GDP data for July, which is expected to accelerate to 0.2% monthly, up from 0.0% previously. This would lift annual GDP growth to 1.3% from the earlier 0.7%.​

Cable Har More Room to Go

The cable has risen significantly since completing a broadening wedge pattern at 1.2662 in August, leaving behind support to achieve new highs of 1.3265. Should prices remain above the swing support of 1.3043, the pair may reach the 100% extension of the broadening wedge's height near 1.3424. Otherwise, the next level of support lies at 1.2895.​

Source: SpreadEx / GBPUSD

Key Takeaways

The UK economy continues outperforming expectations, leaving the BOE lagging other central banks in cutting rates. While slowing growth is expected later in the year, recent data shows ongoing strength in employment levels, making it difficult for the BOE to commit to further rate cuts due to inflation moving in the desired direction and concerns over potential shocks to the resilient jobs market. Some loosening is occurring slowly, and economists now only expect one more rate cut this year than three from the Fed and ECB. Upcoming GDP data this week could confirm the trend of faster-than-forecast growth, potentially strengthening the pound over the coming months.