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Overview of the GBP/USD pair. October 18th. Wages in the UK are rising, but the labor market is weakening
October 18, 2023 9:26 amVideo
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The GBP/USD currency pair traded differently on Tuesday compared to the EUR/USD pair, which happens relatively rarely. However, yesterday in the UK, a set of statistics was released (which is also not very common) and had no relation to the euro, yet it exerted pressure on the British pound. As a result, the pound remained below the moving average and leant towards a decline on Tuesday, while the euro managed to overcome the moving average and leant towards an increase. However, one day will not disrupt the trend that has formed recently. Therefore, we still believe that the British pound will undergo a correction and will overcome the moving average.
In essence, only one report was published in the UK yesterday: on earnings. They increased by 8.1% in August, but this figure cannot be considered low or high. The month prior, there was an increase of 8.5%, which is the highest value in the current cycle. Thus, 8.1% is only slightly lower. It’s not possible to talk about a clear downward trend with just this data.
It’s worth remembering that the faster and stronger wage growth is, the more money the British people spend. Demand increases, and manufacturers and retailers raise prices based on this factor. Price increases lead to inflation, which the Bank of England is struggling to combat. Since the Bank of England did not raise rates in its last meeting for the first time in a year and a half, it means that its options are running out. Therefore, every new acceleration of inflation or a lack of slowdown in inflation will no longer necessarily lead to a response of monetary policy tightening. Thus, the unsatisfactory inflation rate does not provide support for the British pound, which has already lost 1,100 points in the past two months.
Based on the analysis conducted, it can be concluded that the earnings report is negative for the pound. It may still lean towards growth, but in the medium term, there are no grounds to expect its strengthening. We believe it will continue to strive for the level of 1.1844.
Optimist Swati Dhingra. We have mentioned before that Bank of England figures such as Andrew Bailey or Huw Pill are trying to convey the idea to the public of an imminent slowdown in inflation. This is understandable, as high inflation affects the real income of citizens, and the least affluent segments of the population, who make up the majority in any country, suffer the most. Therefore, if inflation cannot be significantly reduced, it is necessary to instill confidence in the people that it will decline in the near future. This is what Bailey and his colleagues are engaged in in 2023. We have heard the figure of 5% by the end of the year multiple times, but so far, the consumer price index is not making a strong move towards that level.
One of the members of the Bank of England’s Monetary Policy Committee, Swati Dhingra, stated yesterday that he sees signs of weakening in the labor market. This would mean that the number of job openings is increasing while the number of job offers is decreasing. Consequently, employers no longer need to raise wages in their competition for employees, which should lead to a slowdown in wage growth and lower inflation. This is how Mr. Dhingra perceives the situation. We, on the other hand, see it the other way around. “I don’t see further impetus for wage growth,” the official said. There may or may not be further impetus, but 8% wage growth is already quite significant.
Mr. Dhingra also mentioned that he sees signs of wage weakening, which should eventually lead to lower inflation. Well, the inflation report for September will be released in half an hour. According to forecasts, the indicator should slow down to 6.6% y/y, which is a 0.1% decrease. It’s hard to say if the Bank of England is expecting such a minor slowdown. We consider these figures to be minimal, so the pound could easily resume its decline today. However, a more significant decrease in CPI could lead to pound strength, which would be very timely based on the current technical picture.
The average volatility of the GBP/USD pair over the last 5 trading days is 100 points. For the GBP/USD pair, this value is considered “average.” As a result, we anticipate movement on Wednesday, October 18, within the range defined by the levels of 1.2080 and 1.2280. A reversal of the Heiken Ashi indicator downward will signal a possible resumption of the downward movement.
Nearest support levels:
S1 – 1.2146
S2 – 1.2085
S3 – 1.2024
Nearest resistance levels:
R1 – 1.2207
R2 – 1.2268
R3 – 1.2329
Trading recommendations:
In the 4-hour timeframe, the GBP/USD pair has dropped below the moving average. Therefore, new short positions can be considered with targets at 1.2085 and 1.2024 in case of a price rebound from the moving average. In the event that the price consolidates above the moving average, long positions with targets at 1.2268 and 1.2329 will become relevant again. We support the second scenario.
Explanations for the illustrations:
Linear regression channels – help determine the current trend. If both are pointing in the same direction, it indicates a strong trend at the moment.
Moving average line (settings 20.0, smoothed) – determines the short-term trend and the direction in which trading should be conducted.
Murrey levels – target levels for movements and corrections.
Volatility levels (red lines) – the likely price channel in which the pair will trade over the next day, based on current volatility indicators.
CCI indicator – its entry into the overbought territory (above +250) or oversold territory (below -250) indicates an upcoming trend reversal in the opposite direction.
The material has been provided by InstaForex Company – www.instaforex.com
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