At the time of writing, GBP/USD is trading at $1.2535, having dipped below yesterday’s equivalent levels.
The Pound (GBP) ticked lower against its peers on Tuesday as UK unemployment rose in March as forecast and wage growth exceeded expectations. Signs of a looser labour market may encourage the Bank of England (BoE) to cut interest rates sooner rather than later.
As predicted, the unemployment rate for March rose to 4.3% from 4.2% at the last reading. Also meeting forecasts, the economy laid off a significant number of workers in the January-to-March period; although the exact figure fell slightly short of expectations. Still, the 177K job losses reported exceeded the previous reading of 156K.
Wage growth data reported that average pay including bonuses rose by 5.7% – the same as in the previous period. Economists had estimated that wages would rose by 5.3%: the higher-than-forecast reading indicates that persistent inflation still may be driving salary growth.
The UK’s central bank is now in a difficult position, as price pressures continue to impact the economy while high interest rates simultaneously pressure services and productivity. The quandary may further complicate BoE expectations, as conflicting comments from policymakers this year have already put Sterling traders on guard.
Speaking on Tuesday, chief economist Huw Pill told markets:
‘Rates of pay growth remain quite well above what would be consistent for meeting 2% inflation target sustainably. We need to keep a restrictive stance on monetary policy that continues to bear down on domestic inflation persistence.’
Yet Pill also noted that by summer, the bank may be in a position to consider interest rate cuts. Pound investors will undoubtedly be keeping their ears to the ground as the week progresses, for any further hints at the central bank’s likely policy direction.
US Dollar (USD) Trends Sideways Ahead of PPI Report
The US Dollar, while firming against the Pound, traded in a narrow range against the majority of its peers on Tuesday ahead of the latest US Producer Price Index (PPI). April’s data was expected to reveal an increase in headline inflation on a monthly and an annualised basis, with core readings remaining unchanged from the previous month.
Investors were on tenterhooks ahead of the release, as data indicating a possible easing in inflation could alter the Federal Reserve’s aggressive stance on interest rates. At the time of writing, the Fed is the most hawkish of the major central banks.
Another factor influencing USD trading was the scheduled speech to be given on Tuesday afternoon. Markets assessed that Fed Chairman Jerome Powell may communicate information that would have a bearing on the central bank’s interest rate trajectory.
‘Greenback’ traders were also somewhat preoccupied by the prospect of today’s consumer price release. Consumer inflation generally has a more significant impact than producer price dynamics on monetary policy expectations; an expected easing in the annualised Consumer Price Index (CPI) raised further questions regarding the Fed’s hawkish stance.
Experts have already suggested that the US central bank may be ready to pivot away from its hawkish outlook: following a press conference earlier this month, Gennadiy Goldberg, an economist at TD Securities, told markets:
‘I think the Fed’s telling you hikes are not quite as on the table as the market was expecting.’
According to the latest Reuters poll, the Fed is expected to cut interest rates by 25 basis points in September by 70 of 108 economists; 65 of 108 economists believe the bank will cut rates by 50bps overall in 2024.
GBP/USD Forecast: US Speech and Data to Influence Exchange Rate?
The Pound US Dollar exchange rate may trade today according to the result of Tuesday’s PPI data and Fed Chairman Powell’s speech at the Foreign Bankers’ Association’s Annual General Meeting in Amsterdam.
If Powell struck a dovish tone, the ‘Greenback’ may extend losses through today’s session. Nevertheless, markets are also likely to be preoccupied by the imminent release of April’s Consumer Price Index. Ahead of the event, USD traders could be hesitant of placing any bets.
A lack of significant UK data leaves the Pound to trade according to external factors. Of course, the outcome of the latest US inflation data will also have a bearing on Sterling performance given that the US economy is the largest in the world and therefore exerts influence over the entire currency market.
Risk sentiment may also dictate GBP movement, however. As the Israeli military advance into Rafah – a Gazan city packed with Palestinian civilians seeking safety – a surge in risk-off sentiment could trigger a drop in Pound appeal.