Sterling rises on strong UK job demand

• Sterling adds nominal gains against the US dollar after the release of mixed UK labor market data.
• An expected slowdown in UK wage growth would drive the outlook for a BoE interest rate cut this month.
• Investors await US inflation data for further guidance on the Fed’s rate cut path.

The British pound (GBP) is trading slightly higher against its major peers in the London session on Tuesday following the release of the United Kingdom (UK) mixed employment report for the three months to July. The British currency is strengthening as the UK’s Office for National Statistics (ONS) reported robust job demand, while wage growth fell largely in line with expectations.

The agency reported that the IOM unemployment rate fell to 4.1 percent from the previous release of 4.2 percent. UK employers hired 265,000 new workers, significantly higher than the previous release of 97,000. Historically robust job growth is fueling the Bank of England’s (BoE) bearish bets. However, it is less likely to be in this scenario as data on average earnings, a measure of wage growth that drives inflation in the services sector, decelerated as expected.

BoE policymakers remained concerned about lingering inflation due to high inflation in the services sector. A slowdown in the pace of wage growth would ease them and fuel market speculation for a BoE interest rate cut this month.

Average earnings, excluding bonuses, were 5.1%, as expected, down from the previous version’s 5.4%. Data on wage growth, including bonuses, decelerated faster than expected to 4% from estimates of 4.1% and the previous reading of 4.6%, revised up from 4.5%.

Daily Market Reasons: Sterling gains slightly against the US dollar

• Sterling is rising but remains below the crucial 1.3100 resistance against the US dollar (USD) in the European session on Tuesday. GBP/USD is gaining slightly, but the short-term outlook remains uncertain as the US dollar holds on to Monday’s gains.
• The U.S. dollar index (DXY), which tracks the greenback against six major currencies, is clinging to gains near 101.60 as investors focus on U.S. (US) consumer price index (CPI) data for August, which will be published on Wednesday. .
• Although the Fed is almost certain to start cutting interest rates this month, inflation data will influence market speculation on the likely size of the rate cut. According to CME’s FedWatch tool, there is a 29% chance the Fed will cut interest rates by 50 basis points (bps) to 4.75%-5.00% in September, while the rest favor a 25-bps rate cut basic points.
• The likelihood of a big Fed rate cut fell somewhat after the release of US non-farm payrolls (NFP) data for August on Friday, which indicated that the slowdown in job growth was not as bad as expected. it seemed in the July data.
• Meanwhile, economists forecast that the annual US CPI fell to 2.6%, the lowest level since March 2021, from 2.9% in July. Core inflation – which excludes volatile food and energy prices – is expected to have risen steadily at 3.2%. Both monthly and core inflation are expected to have increased by 0.2%.
• Weaker-than-expected US inflation data would drive market expectations for the Fed to aggressively begin its policy easing process. On the contrary, sticky or hot CPI numbers would weaken them.

Technical Analysis: Sterling is below 1.3100

Sterling is trading in a tight range and remains vulnerable near the round-level resistance at 1.3100 against the US dollar. GBP/USD is at a rally or break point as it hovers near the trend line drawn from the 28 December 2023 high of 1.2828. On August 21, the Cable offered a sudden upward move after a break of the aforementioned trend line. The pair found an intermediate cushion near the 20-day exponential moving average (EMA), which is trading around 1.3075.

The 14-day Relative Strength Index (RSI) is falling in the 40.00-60.00 range, suggesting that the bullish momentum is over for now. However, the optimistic trend remains intact.

Looking to the upside, the cable will face resistance near the round-level resistance of 1.3200 and the psychological level of 1.3500. On the downside, the psychological level of 1.3000 appears as crucial support for the GBP bulls.