UK Jobs and US CPI to Move Cable

Tomorrow's two big data releases bookend cable, with recent trends suggesting the pair could continue lower - unless the data provides investors with a new perspective.

Good News is Bad News

Despite the UK having the highest inflation of major economies, there is some good news for the British: Pay has increased even faster, allowing many Britons to skirt the cost-of-living crisis and keep the economy afloat. But this is bad news for the BOE trying to get inflation to go down. BOE governor Andrew Bailey has repeatedly called the high wages a major obstacle in getting CPI change back to target.

General tightness in the UK labour market has increased wages, increasing expectations that the BOE will keep hiking. Ahead of Britain's central bank's rate-setting meeting later in the week, investors will be keen to see if there is any easing of the tightness of the labour market. That could raise bets that the BOE might keep the pause going under the hopes that the second-order effects of inflation are starting to dwindle. A sign of this is the unemployment rate, which is expected to tick up to 4.3% from 4.2% prior. Average earnings, however, are expected to keep exerting pressure on inflation, though diminish to 7.3% from 7.7% prior. Finally, the claimant count is expected to fall to 9.0K compared to 17.8K.

Making the Case to Extend the Pause

Next up is the all-important US CPI figures, which are under renewed focus after the surprise beat in NFP reported on Friday. There, average hourly earnings increased at a 0.4% monthly pace, which could be seen as pressuring inflation higher. With US core inflation still doubling the Fed's target, there is a case to be made that the Fed will be very disinclined to turn towards easing in the near future. Given that their forecasts are for an unchanged core rate this month at 4.0%, just a one-decimal beat over expectations would show inflation rising and could further solidify the hawkish stance of the Fed.

The consensus is that headline inflation will drop to 3.1% from 3.2% prior. Meanwhile, if the core rate is at or below expectations, it would be the lowest level in two years. That could leave the markets more reassured in their expectation of rate cuts next year and weaken the dollar. If, by comparison, the UK data exceeds expectations, then cable could break its downward trend for December so far. On the other hand, the market reaction will likely be highly dependent on what happens over the next couple of days with both the Fed and the BOE meetings.

Cable in Wedge Pattern For Now

So far, the downward price action off the $1.2735 peak resembles a wedge pattern, which can lead to a continuation following a pullback or a full-blown reversal. In the former case, $1.26 might play a critical role in offering resistance as its rejection would suggest a medium-term move towards $1.2340 and possibly $1.22 if $1.25 gives way to bears. However, if the round resistance fails to hold off bulls, the next level of high importance above the peak would be at $1.28.

Source: SpreadEx / GBPUSD

Key Takeaways

Upcoming UK jobs and US CPI data releases are expected to impact cable. The UK jobs data may ease inflation concerns, potentially keeping the BOE from hiking, while the US CPI could reassure markets about the Fed's cuts unless it comes in hotter than expected, weakening the dollar. The impact will largely depend on the upcoming Fed and BOE meetings, though later in the week, with the current downward trend potentially continuing unless the UK data surpasses expectations.