GBP/USD Drifting, Markets Eye UK Employment and U.S. CPI Data

06/12/2023

2 minutes read

2023.06.12 09:56

There are no UK of US tier-1 releases on Monday
On Tuesday, UK releases jobs data and BoE’s Bailey testifies before House of Lords committee
US releases inflation data on Tuesday, with Fed rate announcement on Wednesday

The is trading quietly on Monday at 1.2566, up 0.11%. The pound took advantage of a broadly weak US dollar last week, gaining 1%.

There are no tier-1 releases out of the US or the UK, so it should be a calm day for the pound. Tuesday could be the polar opposite, with key releases on both sides of the pond. The UK releases May employment data and Bank of England Governor Bailey testifies before a House of Lords Committee. In the US, the markets are anxiously awaiting Tuesday’s inflation report, which comes just one day before the Fed rate announcement.

UK jobs numbers could point in different directions

The UK labour market has proven resilient to the BoE’s aggressive tightening cycle. Perhaps too much of a good thing, as inflation remains sticky, although it did fall to 8.7% in May, down from 10.1% in April. The good news for the BoE is that the labour market appears to be cooling, and that should help reduce inflation.

The markets are expecting mixed numbers in May. The unemployment rate is expected to rise from 3.9% to 4.0% and employment change is projected to fall from 182,000 to 150,000. At the same time, wage growth including bonuses is expected to rise from 5.8% to 6.1% and unemployment claims are expected to drop. If the data turns out to be a mixed bag, it will be interesting to see Governor Bailey’s take when he testifies before the House of Lords committee.

Inflation is expected to continue to ease in May. Headline inflation is expected to fall from 4.9% to 4.1%, and the core rate is projected to ease from 5.5% to 5.3%. Market rate pricing is swinging, with the probability of a pause rising from 70% on Friday to 77% today, according to the CME’s FedWatch. A rate hike remains unlikely, barring a sharp spike in inflation.

If the Fed stays on the sidelines, the markets will be looking for clues as to what happens next. The Fed may decide to skip raising rates on Wednesday but leave the door wide open for further rate hikes, as early as in July. There seems to be some support amongst Fed members for more tightening, and a pause tomorrow may turn out to be a short skip ahead of more rate increases.

GBP/USD Daily Chart