The British pound traded near the 1.2500 level against the US dollar on Tuesday, as investors awaited the latest UK labour market report. The GBP/USD pair had bounced off a three-month low of 1.2435 last week, but failed to sustain the recovery momentum and retreated from the mid-1.2500s on Monday.
UK employment data in focus
The UK Office for National Statistics (ONS) will release the monthly employment data for July at 06:00 GMT on Tuesday. The report will include the unemployment rate, the claimant count change, the average earnings index and the employment change.
According to a Reuters poll of economists, the unemployment rate is expected to tick up to 4.8% in July from 4.7% in June, while the claimant count change is forecast to show a decrease of 71.7K in August from a drop of 7.8K in July. The average earnings index, which measures the change in the price businesses and the government pay for labour, is projected to rise by 8.2% in the three months to July, slightly lower than the 8.8% increase in the previous period. The employment change, which shows the number of people employed during the previous three months, is estimated to increase by 178K in July, following a 95K rise in June.
The UK labour market data will provide an update on the economic recovery from the coronavirus pandemic and its impact on inflation and monetary policy. The Bank of England (BoE) has been signalling that it is close to ending its stimulus programme and raising interest rates, as inflation has surged above its 2% target and is expected to reach 4% by the end of the year.
However, some uncertainty remains over the pace and timing of the BoE’s policy tightening, as the UK faces several challenges, such as the end of the furlough scheme in September, the rising COVID-19 cases and hospitalisations due to the Delta variant, and the supply chain disruptions caused by Brexit and global shortages.
USD stalls its retracement slide
Meanwhile, the US dollar halted its decline from a multi-month high and regained some ground against its major rivals on Tuesday. The greenback had fallen sharply on Monday, as investors reduced their expectations for an early tapering of the Federal Reserve’s (Fed) bond-buying programme, following a disappointing US jobs report on Friday.
The US economy added only 235K jobs in August, well below the market consensus of 750K and the previous month’s revised figure of 1.053 million. The unemployment rate dropped to 5.2% from 5.4%, while the labour force participation rate remained unchanged at 61.7%. The average hourly earnings rose by 0.6% month-over-month and 4.3% year-over-year, beating the forecasts of 0.3% and 4%, respectively.
The weak jobs data cast doubt on the Fed’s readiness to announce a reduction of its $120 billion per month asset purchases at its next meeting on September 21-22. The Fed has indicated that it will start tapering its stimulus once it sees “substantial further progress” in the labour market and inflation.
However, some Fed officials have maintained a hawkish stance and suggested that they are still in favour of scaling back the bond-buying programme this year. For instance, Dallas Fed President Robert Kaplan said on Monday that he would stick to his call for tapering to begin in October or shortly thereafter, unless there is a material deterioration in the economic outlook.
The US dollar was also supported by the risk-off sentiment in the global markets, as investors remained worried about the slowing economic growth amid the resurgence of COVID-19 cases, especially in China and other emerging markets. The safe-haven demand for the greenback was also boosted by the geopolitical tensions between North Korea and South Korea, after Pyongyang fired two ballistic missiles into waters off its east coast on Wednesday.
Technical levels to watch
The GBP/USD pair is currently trading around 1.2515, with immediate support seen at 1.2500 (psychological level) and then at 1.2435 (three-month low). On the upside, resistance is located at 1.2550 (intraday high) and then at 1.2600 (round number).