Cable hasn’t had an inflection point like other currency pairs in the wake of the US election. Although the pound is weaker compared to the dollar, it’s within the trend that was observed before the election. A good deal of that could be attributed to the situation in the UK Economy. The question for traders now is whether that trend will continue.
This week, there are two key data points that could help resolve those doubts. First are employment figures, as the jobs market has continued to be hot since the pandemic. This has kept the BOE from fully committing to rate cutting. The second is GDP later in the week.
Looking for the Bounce to Continue
The British economy bounced off of a technical recession last year. If it were to trend higher, it could keep the pound elevated respect to its peers. The issue here, though, is the budget. Some analysts believe that increased spending will keep the UK Economy going, while others argue that the added taxes could nip that growth in the bud. Time will tell who is right, but it makes tracking the data on the economy all that more important.
If the British economy grows, that keeps the pressure on inflation to the upside. With taxes on top, the BOE could find its easing program coming to a screeching halt. With the Fed also seeing the possibility of growth and inflation, this might mean that cable won’t gain as much. But, it could keep the pound holding its ground with the greenback while other major currencies slide. How long this could last as the UK Economy runs a trade deficit is another question, but in the short term, there is a path for a stronger pound.
What to Look Out For
Tuesday could see the first cracks in that narrative, however, as the unemployment rate is expected to tick up to 4.1% from 4.0% prior. Average earnings have been coming down, and are forecast to keep that trend at 4.6% growth compared to 4.9% prior. A higher unemployment rate or wages slowing faster than expected could get investors back towards pricing in more BOE rate cuts. The central bank has repeatedly pointed to tightness in the labor market as the main obstacle to cutting rates.
After two quarters of gain, Friday’s GDP data could be make-or-break for the narrative of the rebound. A significantly slowed economy could also undermine the narrative that has been propping up the pound lately. The monthly figure for September is out at the same time, but the market is likely to be mostly interested in the quarterly data. Q3 UK GDP growth is expected to slow to 0.3% from 0.5% prior, which would bring the annual rate to 0.8% up from 0.7% prior.
The Potential Market Reaction
After the most recent cut, markets are expecting the BOE to skip a meeting before cutting again in February. Though we should remember that the bank doesn’t meet in January, so in terms of meetings, that’s not all that far away. The move in the pound will likely correlate with expectations around that rate cut.
The markets could look past a rise in the unemployment reading, particularly if average wages come in as expected. This is because there is doubt about the accuracy of the labor data due to the low response rate. In any case, what matters in the medium to long term is what the BOE remains concerned about the labor market. And there the focus isn’t on a specific rate, but whether or not there is pressure on prices.
