ECB and UK Jobs in Focus

European monetary policy will be in focus as the ECB meets, with key UK employment data influencing whether the BOE cuts rates at its next meeting.

Pause for Effect

The ECB cut its target rate by 25 basis points at its last monetary policy meeting, as widely expected. Currently, the consensus view expects the ECB to keep rates unchanged at this meeting on Thursday to allow previous policy actions to take effect in markets and determine the next steps. The urgency for additional monetary stimulus has lessened since the ECB has enacted some easing. However, inflation remains far from target and risks remain that could push inflation higher.

The last meeting was seen as holding rates despite calls for further cuts because the ECB did not provide clarity on the next steps. ECB President Christine Lagarde stated rates would depend on economic data, meaning each meeting could involve action. Looking ahead, current data does not indicate another rate cut at this meeting based on market forecasts of the next cut in September. As a result, Lagarde's comments after this rate decision will be closely watched to see if she maintains the data-driven approach or provides some guidance to avoid surprising markets at the next meeting in September. The ECB will be in recess through August and reconvene again on September 12th.

Up There Are Clouds

The British pound has strengthened due to the certainty from the recent UK election results and positive economic data releases. This indicates that the technical recession from last year is now well in the past. However, tomorrow's employment report could challenge the currency. With the US dollar rising since the attempted assassination of US presidential candidate Donald Trump over the weekend, any weakness in the pound from expectations of BOE interest rate cuts could lead to declines versus the US dollar.

The upcoming wage data comes at an important time, as markets currently see a 50% chance the BOE will cut rates at their August meeting. If the data differs from expectations, it could impact this view and move gilt yields. The BOE has kept rates higher due to concerns that tight labour markets are keeping inflation high. If unemployment comes in lower than expected or wages rise more slowly, markets may start pricing in an August rate cut and weaken the pound. Conversely, signs of ongoing tightness in labour could signal expected rate cuts in September or later, strengthening the pound. Forecasts are for UK unemployment to remain at 4.4% and jobless claims to decrease to 20K from the prior month's 50.4K.

Cable Breaks Past Pennant

Cable has moved outside its completed rising pattern structure after initially failing to break through the 1.2815 resistance and retreating to 1.2615. The breakout has exposed the 1.3140 peak as the pair trades just below the 1.30 round resistance, with a move beyond the top opening the door to 1.35 and 1.40 in the medium term. Conversely, losing the swing support of 1.2815 and 1.2615 may pave the way for a decline to 1.25.

Source: SpreadEx / GBPUSD

Key Takeaways

​European and British monetary policy will be in focus this week as ECB meets following its recent cut and key UK employment data could impact expectations for an August interest rate cut by the BOE. The ECB is unlikely to make any changes but will be in recess through August before its next meeting in September, so traders will watch President Lagarde for potential signals. The British pound has strengthened recently but may weaken if UK wage growth or employment come in weaker than forecast, increasing the chances of an August rate cut.