Strong Labor market and decreasing inflation
Recently published data from the UK were mixed. Last week’s GDP was disappointing, and this week’s labor market data and inflation numbers were encouraging.
GDP data released last Friday showed that the British economy is slowing down. UK GDP contracted by 0.5% in December, while the market expected only a 0.3% shrink. Also, the Preliminary GDP for Q4 2022 showed stagnation, while on the annual scale, the UK economy raised only 0.4% in the fourth quarter. The IMF downgraded the UK’s growth forecast, predicting that the British economy can string by 0.6% this year, which is also consistent with BOE forecasts.
After last week’s disappointing economic data, this week’s UK labor market, with a steady unemployment rate of 3.7% and December Average Earnings Index +Bonus at 5.9%, showed that we should not be too much disappointed. On Wednesday, we had British inflation numbers as well. UK CPI in January eased to 10.1% annually. This is while in January, consumer prices eased by -0.6%, and producer prices decreased by -0.1%. Inflation data have shown that prices in the UK are cooling. However, inflation remains firmly above 10% though additional measures would be required to bring price pressures down.
With a 50 bps rate hike in the February meeting, BoE brought the official bank rate to 4.0%. While the statement after the meeting was more dovish than expected, pointing to a possible pause in rate hikes, if we see more encouraging data from the labor market, they probably raise the rates by 25 bps in the next meeting instead of pausing the rate hike policy.
Better than expected job market data and decreasing inflation could support the Sterling, but stronger US with re-increasing inflation numbers, sent the GBPUSD to a clear downtrend. Cable is currently trading around 1.2050, with the next support at 1.2000. Lower than the next support, 1.1950 will be in the spotlight, and then we have to watch 1.1860. On the flip side, if the GBPUSD returns, it may encounter resistance at 1.2140 and then 1.2260 before getting enough power to touch above 1.2400.