UK wage growth eases

The British pound is slightly higher on Tuesday, as the markets digest today’s UK employment report. Wage growth rose by 5.9% in the October-December period, down from 6.5% and the lowest since the three months to July 2022. This was also lower than the forecast of 6.2%. The unemployment rate held at 3.7% and unemployment claims fell by 12,900, following a drop of 3,200 in the previous release.

The BoE will be pleased with the drop in wage growth, as it signals a cooling in the labour market which is critical in the battle to lower Inflation. The central bank is anxiously waiting for the January inflation report which will be released on Wednesday. Headline CPI is expected to fall to 10.2%, down from 10.5%, but these levels are unacceptably high, leaving the BoE little choice but to continue raising rates. The BoE meets next on Mar. 22 and is expected to raise rates by 25 basis points.

Will US inflation continue to fall?

In the US, the markets are locked and ready ahead of today’s key inflation report. Inflation is projected to fall to 6.2%, down from 6.5%, but there is unease in the markets that headline inflation might be stronger than expected. The recent blockbuster jobs report indicated that the US labour market remains robust and January has seen higher energy and used car prices. The markets aren’t as confident that the Fed will cut rates late in the year and if the inflation report is higher than expected, the markets could fully price in two more rate hikes. This would be a major shift towards the Fed stance, as Jerome Powell has been saying for months that the pace of rate hikes will likely be higher and longer than previously expected.

Recent inflation releases have had a significant impact on the US dollar, which has fallen sharply when inflation has been weaker than expected. Today’s inflation report will likely follow that pattern, and if inflation is weaker than expected, the dollar should lose ground. Conversely, look for the greenback to post gains if inflation is higher than forecast.

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GBP/USD Technical

• GBP/USD is putting strong pressure on resistance at 1.2180. Above, there is resistance at 1.2304
• 1.2071 and 1.1958 are providing support