FX.co ★ GBP/USD: UK labor market supported the pound, but there are still important releases ahead

Key labor market data was released today in the UK, which provided support for the British currency. In general, the economic calendar of the current week is full of important events for the pound. Today we learned the situation on the British labor market, tomorrow, the inflation report, and on Friday, data on retail sales in the country will be released.

However, GBP/USD traders are, so far, in no hurry to react to the news flow from the UK. The focus is on the report on inflation growth in the United States, which will be published today.

The British labor market is in good shape

According to the data published today, the unemployment rate in Britain remained at 3.7%. This is the third month in a row that the indicator has been at this level. Another component of the release was pleasantly surprising: the number of applications for unemployment benefits in January decreased by almost 13,000, while most experts expected the opposite dynamics (growth of 18,000).

Salary indicators showed a mixed picture. The level of average earnings, taking into account bonuses, reached 5.9% (the weakest growth since July last year), while excluding bonuses, the indicator rose again, rising to the target of 6.7%. There has been a consistent growth since May 2022.

Overall, we can say that the UK labor market is in pretty good shape. But conflicting wage figures clearly mixed up all the cards, not allowing GBP/USD traders to decide on the vector of price movement. For example, in the United States, the trend is clear: the labor market remains strong, while the pro-inflationary factor (the wage component) is slowly but consistently dissipating. In the UK, the situation is not as straightforward: the level of "net" wages (without bonuses) is consistently rising, making it difficult for the central bank to reduce inflation.

Inflation first

The UK labor market supported the pound, but the main test for the British currency will take place tomorrow, February 15, when the data on inflation growth in the UK will be released.

Recall that the Bank of England, following the results of the February meeting, softened the rhetoric of the accompanying statement, indicating, in particular, that further tightening of monetary policy would be required in the event of a "steady increase in price pressure." At the final press conference, BoE Governor Andrew Bailey, responding to a question about the prospects for further rate hikes, urged to be guided by the rhetoric of the accompanying statement. But he made it clear that further decisions on the rate will be made from meeting to meeting—there is no pre-agreed trajectory of the hike.

Given this disposition, tomorrow's UK inflation report may cause strong price turbulence for the GBP/USD pair.

According to preliminary forecasts, the overall consumer price index in monthly terms will fall into the negative area (-0.4%) for the first time since January 2022. On an annualized basis, downward dynamics is also expected: the indicator should reach 10.3%. And although the overall CPI will still remain at an unacceptably high level, it will be possible to talk about the current trend (the indicator has declined for the third month in a row). The main consumer price index should come out at around 6.2%. Here the situation is not so clear. Core inflation reached its peak in September last year (6.5%), remained at this level in October, fell to 6.3% in November, and reached the same level in December. On the one hand, the decline to 6.2% will look insignificant. On the other hand, the indicator will update the minimum since July last year.

Also on Wednesday, other inflation indicators will be published in the UK: the retail price index, the producer purchasing price index and the producer selling price index. According to forecasts, all these indicators will demonstrate downward dynamics, reflecting the slowdown in inflation in the country.

Conclusions

Despite the fairly good data on the growth of the British labor market, it is risky to open long positions on the GBP/USD pair now. There are two releases ahead, which can significantly "redraw" the fundamental picture of the pair. The first one will be released today (U.S. Inflation Report), the second one tomorrow (UK Inflation Report). These events will trigger strong price turbulence for the GBP/USD pair, and today's "volatility storm" may differ from tomorrow's in terms of price direction. Therefore, at the moment, it is advisable to take a wait-and-see attitude, despite the growth of the British currency.