The Office for National Statistics (ONS) said on Tuesday that the number of jobs in the private sector of the British economy increased by 108,000 in January (against an increase of +131,000 in December), amounting to a record 29.5 million. The unemployment rate in the reporting 3-month period (October-December) remained at the same level of 4.1%, and average earnings (October-December) excluding bonuses increased by 3.7% (in annual terms) after an increase of 3.8% in September-November.
The data presented indicate that the impact of the omicron strain of coronavirus on the labor market was insignificant. In the 4th quarter of 2021, UK GDP grew by 1%, despite a 0.2% contraction in the economy in December amid a wave of omicron strain.
This report on the labor market raises the possibility that the Bank of England may raise its key rate in March, economists say. At the same time, they believe that the Bank of England will be able to cope with rising inflation without resorting to serious monetary tightening, despite the fact that some market participants expect six rate hikes this year.
Nevertheless, despite the strong report on the labor market, the British pound reacted rather reservedly to this publication. Probably, investors are waiting for the release of the inflation report on Wednesday (07:00 GMT) in order to start correcting their positions on the pound.
The consumer price index (CPI) reflects the dynamics of retail prices for a group of goods and services included in the consumer basket, being a key indicator of inflation.
In the previous reporting month (December), the growth in consumer inflation amounted to +0.5% (+5.4% in annual terms). The data suggests growing inflationary pressures, which is likely to support the pound. A reading of the indicator below the forecast/previous value could provoke a weakening of the pound, as low inflation will force the Bank of England to maintain an easy monetary policy. Forecast for January: -0.4% (+5.4% in annual terms).
Also on Wednesday (at 19:00 GMT) the minutes from the January Fed meeting ("FOMC minutes") will be published. At the end of the January meeting, Fed leaders confirmed the decision to accelerate the reduction in asset purchases in order to complete the QE program in March 2022 and begin raising interest rates. Fed officials plan to raise interest rates three times in 2022.
However, among the leadership of the Fed, there is no consensus on this matter. For example, St. Louis Fed President and FOMC member James Bullard said on Monday that the central bank should more aggressively contain inflationary pressures, which would require raising interest rates at a faster pace.
"The central bank should confirm these expectations (of the market) reflected in the (yields) of two-year Treasury bonds, and if we do not do this, it will turn out that we are not protecting the 2% inflation target and are not trying to bring inflation under control," Bullard said, adding that the Fed's leadership is now "not in a situation where you can trudge from meeting to meeting, doing a little each time."
Many economists believe that the dollar has a lot of upside potential, especially against the currencies of countries whose central banks are unlikely to raise interest rates quickly. This primarily applies to the ECB.
As for the Bank of England, it is worth noting that if it does not live up to market expectations in a tighter monetary policy, then the pound may come under additional pressure against the backdrop of an escalation of tension around Ukraine. The military scenario may put new pressure on the British economy, primarily due to rising energy prices, which could lead to a further reduction in household consumption and a reduction in GDP.
Today, gas, petrol and diesel prices in the UK have risen, but experts are confident that the growth will continue further.
The main factors that could force the Bank of England to keep rates low are weak GDP and labor market growth, as well as low consumer spending. In the event of rising inflation, British citizens will be forced to use their savings in order to maintain the level of consumption with a significant increase in prices. In the medium term, consumption could fall, in which case British GDP would come under pressure.
Trading recommendations
At the time of writng, the GBP/USD pair is trading near the 1.3556 mark, remaining in the bear market zone below the key resistance level of 1.3580. The breakdown of support levels 1.3521, 1.3510 may become a trigger for further decline, first to the key support level 1.3395 (200 EMA on the weekly chart), and in case of its breakdown, inside the downward channel on the weekly chart.
In the event of a breakdown of the key resistance level 1.3580 (200 EMA on the daily chart), the target will be the local resistance level 1.3640 (local highs and the upper limit of the descending channel on the weekly chart).
A breakdown of the local resistance level of 1.3745 may again increase the risks of breaking the GBP/USD bearish trend, sending the pair towards the highs of 2021 and the level of 1.4200.
Support levels: 1.3539, 1.3521, 1.3510, 1.3395, 1.3365, 1.3300, 1.3210, 1.3160, 1.3000, 1.2865, 1.2685
Resistance levels: 1.3580, 1.3640, 1.3700, 1.3745, 1.3832, 1.3900, 1.3970, 1.4000
Trading recommendations
Sell Stop 1.3530. Stop-Loss 1.3570. Take-Profit 1.3510, 1.3395, 1.3365, 1.3300, 1.3210, 1.3160, 1.3000, 1.2865, 1.2685
Buy Stop 1.3570. Stop-Loss 1.3530. Take-Profit 1.3580, 1.3640, 1.3700, 1.3745, 1.3832, 1.3900, 1.3970, 1.4000
