Traders will be cautious on the British pound this week as the UK’s Office for National Statistics (ONS) will be reporting on the monthly inflation and jobs report alongside the retail sales numbers on Friday.
The economic reports, especially inflation and jobs will stand out given that these will be the fresh reports after last week’s Bank of England meeting. The central bank, while keeping interest rates steady signaled that it was ready to respond with policy changes, including hiking rates or cutting rates lower.
The central bank also outlined the factors that could push the central bank to act. This included an upward pressure on wages and weaker consumer spending. The central bank, however, noted that it would remain tolerant to inflation overshooting the central bank’s 2% target rate. But some policy members have expressed concern. Last week, BoE member Kristin Forbes said that she was uncomfortable with low-interest rates and said that monetary policy should be “nimble and willing to quickly adjust.”
Warnings that Britons will be bracing for a sharp increase in inflation also intensified after Markit’s survey showed that companies in the services sector are dealing with the biggest jump in input costs in nearly 6-years. The service sector is one of the biggest contributors to the nation’s GDP.
Earlier in February, a poll by Citi and YouGov showed that the public’s expectations for inflation in the coming year jumped to the highest level since the past three years. The short-term inflation expectations, according to the survey respondents is expected to rise to 2.6% from 2.4% in December, marking the highest since 2013. The poll was held between January 20 – 23.
While consumer prices are no doubt set to rise, the talk of wage inflation has been subdued. The central bank also acknowledged that the already low unemployment rate at 4.8% currently hasn’t been doing much to boost wages. The central bank’s recent agents survey of businesses showed that expectations for pay settlements are expected to rise slightly above 2%.
Economists are expecting to see the average earnings rise 2.8% in the three months to December compared to a year ago, putting wages on a steady path. While there is going to be a lot of uncertainty surrounding the Brexit talks and the following trade relationships with the EU, an improvement in the UK’s labor market will be a welcome change no doubt.
GBPUSD – Technical Outlook
The British pound has been trading sideways between $1.2600 and $1.2400. The weekly chart shows GBPUSD forming the double bottom pattern near 1.2200 handle and eventually breaking out from the falling trend line. This could potentially signal a near-term upside gain in prices. Resistance is seen forming at 1.3000 – 1.2900 which could be tested on a continued momentum to the upside.
The 4-hour chart time frame shows prices currently hovering above the $1.2400 support level. This was briefly tested earlier this week before prices posted a sharp reversal. The rally was, however, short-lived as we see prices posting a reversal near the outer median line. A continuation to the downside is expected to see GBPUSD retest 1.2400 support level once again.
From here, a breakdown below $1.2400 could see GBPUSD extend the declines down to $1.2200 which is quite likely to be a strong support level that will once again be tested. Alternately, bounce off $1.2400 could keep the bullish prospects alive as GBPUSD could be seen testing $1.2700.
