UK Jobs to Test BOE Easing Expectations

The market expects more easing from the BOE, yet upcoming employment data could challenge this outlook ahead of the February meeting.

Cooling Inflation Sparks Rate Cut Bets

The ONS inflation data released last week showed UK CPI rising 2.5% in December, missing economist expectations of 2.7% and falling below the 2.6% reported in November. Adding weight to signs that UK inflation pressures are easing faster than forecast, the core rate also fell short of expectations of 3.4% after rising 3.2%. Most important for shaping expectations around BOE, services inflation fell sharply to 4.4% from 5% in November. Though still above the 2% target, central bank officials have repeatedly cited persistently high services inflation as justification for maintaining high rates.

Following the release of the UK CPI, the results prompted markets to increase rate cut expectations for this year. Economists have now doubled their rate-cut projections to 100 basis points from the 50 basis points expected earlier. Some analysts have even suggested a rate cut in February, but futures markets have not fully priced in such a move. Meanwhile, other analysts warned that this is just one data point out of what the BOE considers, with potential upside inflation risks remaining. The jobs data set for release on Tuesday could reinforce the dovish outlook or reverse it, depending on whether jobs data align with recent inflation signals.

Labour Costs Remain Key Concern

Market participants will want to scrutinise whether the tight labour market conditions witnessed in November persist, particularly given the spending slowdown reported that month. The BOE previously voiced concerns over the inflationary impact of wage growth following increases in compensation. Analysts expect the UK unemployment rate to hold steady at 4.3% on Tuesday, with the claimant count forecast to climb to 15K from 0.3K in November.

The focal point likely centres on average earnings including bonus, projected to increase to 5.5% from 5.2% previously. Markets could interpret this as proof that inflationary pressures remain stubborn, potentially reducing rate-cut expectations this year. GBPUSD has traded relatively flat through recent data releases, moving sideways last week after dropping 3% since the start of the year. While increased rate cut prospects might ease concerns about government debt obligations, markets appear to be awaiting labour data to confirm moderating cost pressures.

H&S Neckline Hints at Upside

The Cable appears to be forming a bearish head and shoulders pattern, currently approaching the neckline at 1.2038 after the completion of the head at 1.3436. The left shoulder formed near 1.3142, suggesting potential for a right shoulder around similar levels should prices start to bounce from neckline support. Only then may the pattern turn bearish. Holding support could see prices rebound towards 1.2812 should the resistance at 1.2500 provide leeway to bulls. However, a decisive break lower could trigger further downside towards 1.1800.

Source: SpreadEx / GBPUSD

Key Takeaways

Cooling inflation numbers in the UK have recently increased expectations for BOE rate cuts, yet markets remain wary ahead of the jobs report due for release tomorrow. Although services inflation has eased, persistent wage growth concerns could temper the appetite for early policy, especially given the fiscal issues faced by the country.