Market participants were not surprised by a drop in the pound sterling as analysts had been predicting it for a long time. However, the British currency dipped more significantly yesterday than it did on Monday. However, the main reason for the weakening was not weak macro stats. Traders paid almost zero attention to economic reports. Notably, figures turned out to be slightly better than forecasts. The unemployment rate fell to 4.1% from 4.2%, while economists had expected the reading to remain unchanged. However, wage growth slowed down to 4.2% from 4.9% versus the forecast reading of 4.4%. Taking into account the rising inflation, fresh data showed a decrease in the real income of the population. It may hurt the economic recovery from the coronavirus crisis. Positive labor market data was eclipsed by a grim average earnings report. As a result, speculators ignored all reports. So, the pound sterling was declining solely because of its overbought status.
UK Unemployment Rate:
Today, the UK will unveil inflation data. The reading is projected to rise to 5.2% from 5.1%. If so, the purchasing power of UK residents will drop even more. Yet, surging inflation may force the BoE to raise the key rate. However, last month when inflation data showed an increase, the central bank did nothing. This is why analysts cast doubt on the possibility of the interest rate hike. The Bank of England admitted that it might raise the key rate by the end of the year. It will probably happen no earlier than spring. It means that traders have already priced in this factor. Hence, the pound sterling lacks drivers for further growth. It may dip a bit lower today.
UK Inflation Data:
After resuming the downward movement, the GBP/USD pair returned to1.3600. The weakening of the pound sterling looks like a correction, which may be the case given the overbought status of the pound sterling.
Despite the current decline, the quotes are still in the positive zone. However, everything may change if the current correction transforms into a downward movement.
The RSI (D1) indicator is moving in the upper area of the indicator, signaling the bullish momentum.
The daily chart still signals a reversal of the medium-term trend. This scenario is likely to come true if the price consolidates above 1.3850.
Outlook:
In this situation, the price may remain flat for some time near the 1.3600 level. If so, there is still a chance that the pair will resume its upward inertial movement, triggering a trend reversal.
At the same time, to cement the correction, the pair needs to stay below the Fibonacci retracement level of 38.2. in this case, the pair may recover to 1.3450.
The complex indicator analysis gives a buy signal on short-term and intraday charts due to the price pullback. Technical indicators signal long positions in the medium term amid the inertial movement.