Pound Sterling falls on backfoot on dismal market mood, UK labor market data eyed

Pound Sterling drops as investors shift focus towards the UK Employment data.
Soft wage growth data would soften inflation outlook and increase expectations of the BoE cutting interest rates.
Market volume to remain thin amid extended weekend in US markets.

The Pound Sterling (GBP) faces sell-off ahead of the United Kingdom labor market data for three-months ending November, which will be published on Tuesday. Investors are anticipating a sharp decline in the wage growth and see labor market conditions cooling further due to higher interest rates by the Bank of England (BoE) and deepening cost-of-living crisis amid stubborn consumer inflation.

Soft wage growth data would improve progress in inflation returning towards 2% as lower earnings will eventually result in a decline in households’ spending power. Stubbornly higher wage growth has remained a major booster of sticky consumer price inflation and a decline in the same will provide more relief to BoE policymakers.

The GBP/USD pair is likely to remain inside the woods as the United States markets are closed on Monday. Trading volume is expected to remain thin due to an extended weekend. However, persistent bets in favour of rate cuts from the Federal Reserve (Fed) in the March monetary policy meeting would keep the US Dollar Index (DXY) on the backfoot.

Daily Digest Market Movers: Pound Sterling faces pressure amid risk-off mood

Pound Sterling drops swiftly as investors shift focus towards the United Kingdom labor market data for three months ending November, which will be published on Tuesday.
Demand for labor is expected to remain vulnerable as job postings by the United Kingdom employers were 32% lower in December from a year ago. The Recruitment and Employment Confederation (REC) department said that permanent jobs declined all through 2023.
Investors have projected a slight rise in the Unemployment Rate to 4.3% against the prior reading of 4.2%.
The market participants will keenly focus on the Average Earnings data as robust wage growth has remained a key driver keeping consumer price inflation elevated in the United Kingdom economy.
Average Earnings excluding bonuses is expected to decelerate sharply to 6.6% against 7.3% growth in the period of quarter-to-October while earnings data including bonuses is expected to soften to 6.8% from 7.2% in a similar period.
A sharp decline in wage growth would wane fears of persistent inflation and escalate odds of early rate cuts by the Bank of England.
The Bank of America (BofA) predicts the BoE will consider cutting interest rates after its August monetary policy meeting. This contrasts with prior expectations of February 2025.
On the contrary, BoE policymakers have not publicly discussed rate cuts at all as the consumer price inflation in the UK economy is highest in comparison with other Group of Seven economies.
BoE policymakers have been reiterating the need to keep interest rates in an elevated trajectory to ensure that inflation will return to 2% in a sustainable manner.
After being vulnerable in 2023, the British real estate sector has made a decent start to2024. The UK’s leading real estate platform Rightmove reported a 1.3% increase in asking prices in the period of December 3 to January 6, the highest since 2020.
The market mood is quiet amid an extended weekend in the United States market due to it being Martin Luther King Day.
The US Dollar Index (DXY) trades back-and-forth around 102.40 as investors shift focus towards the monthly Retail Sales data and the release of the Federal Reserve’s (Fed) Beige Book on Wednesday.
Meanwhile, investors’ confidence towards a rate cut decision from the Fed in March has improved after the release of the softer-than-projected Producer Price Index (PPI) report for December.
As per the CME FedWatch tool, chances supporting a rate cut in March have improved to 70% after declining to 62% last week.

Technical Analysis: Pound Sterling sustains above 1.2700

Pound Sterling finds offers but remain above the crucial support of 1.2700 as investors await the crucial UK data for further action. The GBP/USD pair has oscillated in a range between 1.2674-1.2784 for the past week. The broader appeal is still bullish as the 20 and 50-day Exponential Moving Averages (EMAs) are sloping higher. The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating a consolidation ahead. Fresh upside in Cable is expected if it manages to climb above five-month high around 1.2820.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect the Pound?

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

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