Investors have been left wondering whether today’s sluggish jobs data may have any implications on the Bank of England’s rate decision next month. Total pay levels rose at an annual rate of 2.5% in the three months to May, unchanged from April, according to the ONS. Meanwhile regular pay growth, which excludes bonuses, rose 2.7% over the same period, down from 2.8% in the three moths to April. The unemployment rate remained unchanged at 4.2% as expected. But more up-to-date labour market data revealed that jobless claims rose by 7,800 in July, which was more than 2,300 expected. So, overall, today’s data from the UK was slightly below estimates, but not too bad to ring any alarm bells. Although wage growth wasn’t robust, it was still enough to keep the probability of a rate increase in next month around 76% and this figure could actually rise further should tomorrow’s inflation figures meet or surpass expectations. However, if inflation numbers also disappoint expectations then the odds of a rate hike next month could weaken further and consequently the pound could come under some real pressure. In any case, the US dollar’s bullish trend remains intact owing to a hawkish Federal Reserve and this should continue to provide additional pressure on the GBP/USD for the foreseeable future and regardless of short-term bounces here and there.
As noted yesterday, we were not convinced that the GBP/USD’s formation of a bullish hammer candle on Friday marked the low for the cable, for we are still bullish on the dollar. Indeed, despite Monday’s slightly bullish follow-through there hasn’t been any firm acceptance above Friday’s range, making the GBP/USD bulls sweat a little. Now that rates have gone back below Friday’s high and showing some acceptance there, this suggests that the bulls who bought above Friday’s high are now trapped. Even if rates were to turn around again and turn positive we will remain objective and only turn bullish when there is a break in market structure of lower lows and lower highs. The most recent high was at 1.3470. So, this would be the line in the sand for us. For now, though, the path of least resistance is again to the downside and as a result we could see the cable drop to the next pool of liquidity, which is undoubtedly below Friday’s hammer candle at 1.3100. The psychological level of 1.3000 could be the near term bearish objective although we wouldn’t rule out the prospects of an eventual drop to the 61.8% Fibonacci level at just below 1.2900 in the coming days.