The GBP/USD currency pair effectively disregarded today's labor market data in the UK. Some components of the release were in the "green zone," but traders are not willing to open large positions on the pair ahead of tomorrow's events. It's worth noting that on Wednesday, not only will the American Consumer Price Index be published, but also key data on the growth of the British economy. According to preliminary forecasts, the American report will provide support for the greenback, while the British report, on the contrary, will exert pressure on the pound. In the face of such uncertainty, caution among GBP/USD traders seems entirely justified.
Furthermore, after the publication of the latest report on British inflation growth, today's release essentially changes nothing. Just to recap, the overall Consumer Price Index in monthly terms decreased to -0.4%, marking its first negative territory since January of this year. The Retail Price Index decreased to -0.6% compared to an expected drop to 0.7% (the indicator fell into the negative zone for the first time since January 2021). These figures put an end to the discussion of whether the Bank of England will raise rates at its September meeting or not.
Moreover, BoE Governor Andrew Bailey only strengthened confidence in the regulator's wait-and-see stance in his speech last week. He stated that many macroeconomic indicators suggest a sharp drop in inflation. In this context, he added that the interest rate is "much closer to its peak value." His colleague, Swati Dhingra, suggested that the regulator is ready to stay at the current level, noting that the Bank of England's policy is "already quite restrictive."
In other words, there is no intrigue regarding the results of the September meeting (which will take place next week on the 21st). The regulator is likely to keep its parameters unchanged. However, the tone of the accompanying rhetoric will largely depend on the data that were released today and those that will be published tomorrow.
Today, we learned that the unemployment rate in the UK rose to 4.3% in July. On the one hand, the increase is minimal (in June, the indicator was at 4.2%). On the other hand, a negative trend has formed: unemployment has been rising for the third consecutive month. For comparison, in April, the indicator stood at 3.8%.
As for the number of claims for unemployment benefits, it came out in the "green zone." Most experts predicted an increase of 17,000 claims, but in reality, it only increased by 900 claims (the best result since May of this year).
The pound was supported by the inflationary indicator as well. The average earnings level (including bonuses) increased by 8.5%, surpassing the forecasted growth of 8.2%. There's also a clear trend here: this indicator has been steadily rising for the fifth consecutive month, from 5.8% (February) to the current value of 8.5%. Excluding bonuses, the average salary level also demonstrates an upward trajectory—in February, the indicator reached 6.6%, while in June, it reached the target of 7.8%. In July, it also reached 7.8%.
As we can see, the UK labor market report is quite contradictory: on one hand, an increase in unemployment is recorded (and this increase seems to have become stable), but on the other hand, an increase in the average salary level has been noted. Here, we can also talk about a stable trend.
The rise in the salary indicator would be "beneficial" for GBP/USD buyers if other inflation indicators also started to pick up (primarily the Consumer Price Index). However, for now, we are observing the opposite trends. As for the rise in unemployment, it can complement the fundamental picture if tomorrow's reports at least meet the forecasts (let alone entering the "red zone").
According to preliminary forecasts, the GDP volume in July in the UK decreased by 0.2% on a monthly basis. In quarterly terms, the indicator is expected to grow by 0.3%. The volume of industrial production is forecasted to decrease by 0.6% MoM (a year-on-year increase of 0.5% is expected). Manufacturing industry is also expected to reflect negative trends (-0.6% MoM, 2.7% YoY).
Such weak results will put pressure on the British currency. Meanwhile, American inflation may provide support to the greenback. According to preliminary forecasts, the overall Consumer Price Index is expected to accelerate again in August, following the trajectory of July (an increase of 3.6% YoY, after a rise of 3.2% in July).
In summary, we can conclude the current risk of a further downward trend for the GBP/USD pair. If the U.S. CPI comes out in the "green zone," and the UK economy shows weak results, the pair may not only test the support level of 1.2410 (the lower line of the Bollinger Bands indicator on the daily chart) but also settle within the 1.23 handle for the first time since May of this year.
