UK Jobs Could Allow BOE to Cut Rates Soon

As the BOE signals that it may lower interest rates more quickly than anticipated, attention is focused on whether wage inflation pressures are subsiding.

Trends Point to Further Easing

Since the BOE's meeting, which proved more dovish than expected, with two members of the MPC now advocating for a cut, Governor Andrew Bailey has continued conveying an easing stance by suggesting last week that rates may fall faster than projected. However, this is not entirely new, as the Governor has also implied as much prior to the policy meeting. The optimism around rate cuts relies on easing pressures on interest rates, as Britain's central bank expects further loosening in the labour market.

Britain's low unemployment rate has complicated the BOE's efforts to handle inflation during the recent cycle, as wages grew faster than consumer prices, contributing more to inflation than in other major economies. However, after the country slipped into a technical recession last year, employment trends have started to improve. Apparently, the market anticipates that momentum will continue, allowing the bank to be one of the first major central banks to pull the easing trigger, possibly as soon as June.

Down on Both Sides of the Equation

The UK unemployment rate is forecast to remain unchanged at 4.2% on Tuesday, while the claimant count is expected to increase by 6000 people, lower than the prior increase of 10900. A higher claimant count generally signals weaker labour market conditions and could weigh on the British pound. Average hourly earnings growth is expected to continue slowing, with a gain of 5.5% compared to 5.6% prior.

While the market expects BOE to cut due to sluggish UK economic performance, the situation is different in the US. Treasury yields pulled back slightly in the aftermath of weaker jobs data but are rising ahead of inflation as the Fed increased its second-quarter GDP forecast to an annualised 4.2% from 3.3%. With the market anticipating easing from the bank, downward pressure on GBPUSD could depend on clarity around when the Fed may begin to ease policy.

Cable in Potential H&S

Cable has recently found support around $1.2450, potentially forming the neckline of a head and shoulders pattern. This could lead to a move towards $1.2570 to form the right shoulder. However, a flag formation may equally develop instead, allowing for a test of resistance at $1.2635 and eventually resistance of $1.27. While a brief fall below $1.25 is possible, only a move below $1.2450 would invalidate the head and shoulders pattern, exposing 1.24.

Source: SpreadEx / GBPUSD

Key Takeaways

The BOE has signalled it may cut interest rates more quickly than expected, depending on whether wage inflation pressures continue to subside in the UK. Governor Andrew Bailey has signalled an easing stance and suggested rates may fall faster than anticipated. Further loosening in the British labour market could allow the BOE to lower rates as early as June. Unemployment is forecast to remain at 4.2%, while average hourly earnings growth is projected to continue slowing on Tuesday, potentially giving the BOE more flexibility on monetary policy.