UK Jobs and GDP Hang in the Balance

With no end in sight for the BOE's rate hike, this week has a trove of data that could start signalling the UK economy is running out of room for more tightening.

How Far Can It Go?

Although UK inflation is off its highs, it still more than quadruples the target rate. The recent drop appears to be attributable more to base effects than a reduction in price pressures over the last few months, suggesting the BOE could have a hard slog ahead. The bank leaders were recently hauled before Parliament and admitted to making drastic prediction errors. That can hurt the market's confidence in the BOE's commitment and ability to bring down inflation, making stabilising the currency all that harder.

Last Thursday, JPMorgan warned that the UK could be heading for a hard landing, with interest rates hitting 7.0% sometime next year. That would be 200 basis points above the current rate or the equivalent of eight rate hikes. That was the "worst case scenario", with the consensus still agreeing that rates would top out at 5.75% later this year. The dire warnings contrast with the UK data so far, which has seen unemployment below the structural level and the UK managing to avoid a recession at the start of the year by a hair - unlike the nations across the Channel, which have been battered with similar economic conditions.

What Will the Data Say?

The good data could be about to come to an end. The unemployment rate is expected to tick up to 3.9% from 3.8% prior, despite an expectation that the number of claimants will drop by 22K compared to -13.6K prior. Remember that a negative claimant count is typically considered a positive sign because it shows fewer people seeking government assistance. The wage growth due to a tight labour market has been a thorn in the side of the BOE for a while now.

The other issue is Thursday's GDP release, which is expected to show a monthly decline of -0.2% compared to 0.2% growth in the prior month. It's still enough to keep the rolling three-month average to May flat, potentially meaning the UK could avoid a negative number for the second quarter. But it's a worrying direction. Particularly as it comes out along with annual Manufacturing Production data, where analysts expect the contraction to accelerate to 1.6% from 0.9% prior. An economy turning into the red might put a cap on how high the BOE is willing to go, but easing conditions in the labour market might make that decision easier. The pound might weaken slightly on the prospect of fewer hikes, but the FTSE might rely more on its global presence and could shrug off bad news.

Pound in Wedge Pattern?

The double-top could act as the end of a terminal wedge pattern, offering a full-blown reversal to $1.18 or a correction towards the $1.2590-$1.2301 zone unless the lower trendline holds firm or bulls reattempt to take control of $1.2848. In the latter case, the bulls will eye the $1.30 handle next, with the top flipping into decisive support and the $1.29 as interim resistance/support. In the short term, the top and $1.2680/741 may offer rejection or additional flows, depending on UK's events.

Source: SpreadX / GBPUSD

Key Takeaways

BOE's continued rate hikes suggest that the UK economy may be reaching its tightening limit. Despite a decrease in inflation, it is still significantly above the target rate, indicating potential difficulties ahead. JPMorgan warns of a possible hard landing, with interest rates potentially reaching 7.0% next year. However, recent data have shown unemployment below the structural level and the UK avoiding a recession. Yet, upcoming data suggests a potential increase in unemployment and a decline in GDP. The economy's direction is concerning and may influence how high the bank is willing to hike.