GBPUSD Move Could Hinge on Labour Data

Following a hotter-than-expected CPI print in June, market focus shifts to the upcoming UK jobs data to gauge when the BOE might cut rates next.

August Rate Cut Less Likely

The ONS reported on Wednesday that , increasing to 3.6% on an annual basis from 3.4% and above the forecast of 3.5%. Meanwhile, the core inflation rate increased by the same amount to reach 3.7% compared to 3.5% a month earlier. This is the ninth consecutive month that inflation has been above the BOE's 2.0% target and is moving in the wrong direction. The most significant contributors to the rise were fuel and transportation, with the ONS also noting increases in apparel. The persistently growing prices in the service sector are worrisome for the BOE. Still, analysts pointed out that only around 46% of the basket showed price increases, suggesting inflation is concentrated in specific sectors.

after the release as traders pared back bets for a rate cut at the August meeting. Before the data release, futures were pricing in 53 basis points (bps) of cuts this year. Following the print, odds reduced to 49 bps, removing expectations for a second rate cut this year. The BOE had predicted at its last meeting that inflation would remain around 3.4% through the summer, but the rise complicates the outlook as the British economy continues to falter.

Payroll Data Remains Key

The BOE also predicted that inflation will start easing later in the year and has begun to put more emphasis on underlying indicators, such as a weakening labour market. BOE Governor Andrew Bailey emphasised this point in an interview on Tuesday, insisting that and that he saw increasing slack in the economy. The minimum wage hike and higher taxes that took effect in April are expected to result in sharp declines in employment this year, which could ultimately lower consumer demand and prices.

The UK unemployment rate for May is expected to be reported on Thursday and to remain unchanged at 4.1%, with the number of new hires in the month scheduled to drop to 46,000 from the 89,000 reported in April. But more relevant to inflation pressure, average hourly earnings are expected to decelerate to 5.0% from 5.3% prior. Some analysts suggest that t if job numbers show further signs of deterioration. A disappointing report could reverse the gains in cable as markets price back more easing. On the other hand, if the jobs market does not back up Bailey's view of "slack", it could crush hopes for the second rate cut and push the pound higher.

Pound Still Under Pressure

The GBPUSD has been on the back foot, confined to the lower half of the Bollinger Bands (1.3373 - 1.3468) as the upward bump from the CPI release is fading relatively quickly. The RSI also remains close to the oversold territory, which implies potential downward pressure, but it has been flatlining. A move to the downside could find the next support at the lower 'autotrend’ double bottom at 1.3386, with a break below the LBB opening the door to the round 1.3350 and 1.3300 levels. On the flip side, a rebound could extend prices to the middle of the Bollinger Bands at 1.3410, followed by a break to the top of the UBB at 1.3468.

Source: SpreadEx | GBPUSD

Key Takeaways

Inflation in the UK accelerated faster than economists and the BOE expected in June, with persistent pressure in the services sector complicating the outlook for rate cuts. Markets are now focusing on the labour market after the commentary suggested that the BOE is examining underlying factors that would warrant easing if the labour market shows signs of weakening.