fxs_header_sponsor_anchor

Analysis

UK employment preview: Three reasons why GBP/USD could bounce even if wage growth slows

  • Investors may dismiss weak figures in December and attribute them to political chaos.
  • Low expectations make room for an upside surprise after last month's positive one.
  • The trend is favorable for sterling amid Brexit and fiscal stimulus speculation.

Lower wages are bad news for workers and usually also for the pound – but these are abnormal times, and sterling may shine in response to the UK's December jobs report. The focus is on wage growth 

Reaction to critical data in financial markets depends on expectations and positioning and not on the hard data alone.

Here are three reasons why GBP/USD may react positively to the data.

1) Pre "Boris-bounce" figures

The Average Earnings figures – as well as the Unemployment Rate, which is expected to stay at 3.8% – are for December 2019. Back then, the economy still suffered a high dose of Brexit uncertainty. Prime Minister Boris Johnson assumed office in July and oversaw turbulent months in which he struggled with the House of Commons and with the EU.

After striking a deal with Brussels in mid-October, he failed to move it in parliament and called elections. The decisive victory – and a leap in certainty – came in mid-December.

Since then, business and consumer surveys have jumped with the all-important Services Purchasing Managers' Index returning to robust growth in January. Yet while sentiment enjoyed this "Boris bounce," employment decisions move more slowly. 

Therefore, even if figures miss expectations, markets may shrug them off as belonging to the past. We have seen a similar reaction with Gross Domestic Product figures for the fourth quarter. The economy stagnated – a disappointing outcome in absolute terms – but the pound soldiered on.

2) Low expectations 

As the economic calendar is showing, economists expect Average Earnings to decelerate. When including bonuses, estimates stand at a slowdown from 3.2% to 3% yearly. Excluding extra pay, forecasts are for a drop from 3.4% to 3.3%. 

Lower expectations make an upside surprise easier to accomplish. Moreover, both figures surprised in the previous report for November – and this can happen again. During the 11 months of 2019 to which data is available, wages, including bonuses, beat expectations five times, and missed projections four times. 

3) Bullish bias

The UK has already left the EU, but Brexit is far from being resolved. Most rights and obligations apply during the post-Brexit transition period, which expires through year-end. Negotiations about future relations kick off in March, and both sides have laid down their positions – offering stark visions.

At first, sterling dipped in reaction to every threat, but it seems that investors are seeing through the posturing and waiting for leaders to cut deals behind closed doors. The latest comment from France's foreign minister, Jean Yves le Drian, that the EU and the UK will "rip each other" in talks – has left no marks on the pound/dollar chart.

On the other hand, sterling enjoyed a "reshuffle rally." GBP/USD leaped after Johnson forced the fiscally conservative Sajid Javid out of his job as Chancellor and named Rishi Sunak instead. The move paves the way for deficit spending on infrastructure – and markets cheered. The Bank of England could feel less need to act to stimulate the economy.

Overall, the pound is ignoring adverse news and reacting positively to good ones – showing its strength.

Overall, GBP/USD has room to rise.

Three scenarios

1) Within expectations or mildly below: In this scenario, Average Hourly Earnings stand at 3% or 2.9%, and GBP/USD reacts positively due to all the reasons mentioned above. The probability is high, especially for figures to meet expectations.

2) Above expectations: If salaries dipped to 3.1%, which has the medium possibility or even held up at 3.3% – lower chances – GBP/USD might jump to higher ground. If the starting point before the "Boris bounce" is upbeat, sterling may shine. 

3) Well below expectations: If wage growth decelerates to 2.8% or below, that would already be significant and could push the pound lower. A considerable miss has a low probability. 

Conclusion

Overall, the timing of the figures, low expectations, and the current positive trend in GBP/USD create an upside bias, which may see the pound rising even in case of a small miss.

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.


RELATED CONTENT

Loading ...



Copyright © 2024 FOREXSTREET S.L., All rights reserved.