UK Jobs and CPI to Guide BOE, Cable

This week, the UK will release significant economic data, focusing on whether the Bank of England (BOE) is on track to begin easing monetary policy as soon as June.

The Dance of the Central Banks

Less than a month ago, the UK ONS reported that inflation declined faster than markets anticipated, fueling speculation that the BOE could cut interest rates in June. Most economists agree that the first reduction won't occur until the third quarter. However, the surprising UK disinflation and rising US rates have altered expectations around central bank dynamics.

Initially, it was believed the Fed would be the first to lower rates, with the BOE taking action months later. However, if current trends persist, there is a possibility that the UK central bank will act before its American counterpart. Over the past month, this contributed to the British pound declining against the US dollar as outlooks changed. Given continued uncertainty around the timing of easing, upcoming data could solidify the downward currency trend or provide the impetus for a rebound.

Does Employment Matter More Than Inflation?

While inflation ultimately matters most to the BOE due to its single mandate, many economists think high UK price increases stemmed partly from wages rising even faster than inflation, driven by a tight labor market. Perceived easing of wage pressure may spur additional weakening unless the upcoming figures indicate a tighter market than anticipated. A lack of monetary accommodation could prompt the BOE to remain on hold slightly longer.

The first report to be published is employment figures, with unemployment projected to continue slowly increasing to 4% from 3.9%. In contrast, average earnings growth is expected to rise to 5.8% annually from 5.6% prior. The claimant count may also contradict the loosening narrative as applications are forecast to decline by 5K compared to an increase of 16.8K last month. On Wednesday, the ONS will release March inflation data, which is anticipated to show that headline CPI fell to 3.1% from 3.4%. Core inflation is also projected to decline, reaching 4.3% versus 4.5%.​

Cable Re-Enters Basic Trend

The GBP/USD pair has recently returned to trading within its prevailing upward-sloping channel, potentially pausing bullish momentum until renewed validation. Should prices decelerate, support may appear near the golden pocket of the 1.2038 to 1.2895 leg near 1.2365, where the lower channel boundary is situated. If prices rebound at the 50% Fibonacci retracement of 1.2465, bulls may initially encounter resistance around the 1.2567 mark, corresponding to the 38.2% Fibonacci retracement. However, the ongoing correction is unlikely to be complete for the duration that GBP/USD trades within the channel.​

Source: SpreadEx / GBPUSD

Key Takeaways

This week's UK economic data release will focus on whether the BOE is on track to begin cutting rates as early as June. Inflation fell faster than expected recently, altering expectations around central bank dynamics and contributing to pound declines against the dollar. Upcoming employment and inflation figures could solidify the downward trend or provide an upward rebound signal. While inflation is the BOE's primary target, economists think high prices partly stem from rapidly rising wages, so perceived wage pressure easing may spur further easing unless figures show a tighter labor market than forecast.