Sterling traders turn their sights to jobs data – Forex News Preview
February 20, 2018 4:26 pm
The UK will see the release of employment data for December on Wednesday, at 0930 GMT. While practically every indicator is projected to have remained unchanged from the previous month, this is still a major risk event for sterling, as any deviation from the forecasts will likely have a large impact on the currency’s forthcoming path.
According to forecasts, the UK unemployment rate is anticipated to remain unchanged at 4.3% in December, while average weekly earnings (both including and excluding bonuses) are projected to have risen at the same pace as previously. Assuming that the unemployment rate indeed holds steady, then investors will quickly turn their attention to the wage data for any surprises.
Wages are one of the most important indicators for any economy, but this statement is especially true in the case of the UK right now, considering the squeeze in real incomes that has taken place following the Brexit vote. To elaborate – inflation accelerated sharply due to sterling’s depreciation, but wage growth did not keep up the pace, instead remaining more or less flat. This has caused real income growth in the UK to turn negative as inflation outpaces wages, thereby “squeezing” the incomes of consumers. This is a risky situation to be in, as it could lead to a slowdown in consumption that results in a slowdown in the broader economy.
The negative real income growth is also one of the key reasons that have caused the Bank of England (BoE) to be particularly cautious about raising interest rates, as rapid rate hikes could exert downward pressure on wage growth and hence, make a bad situation even worse. In this context, markets will be looking to see whether the squeeze in real incomes is intensifying, or subsiding. In other words, if wages accelerate, that would probably give the “green light” for the BoE to proceed with more rate hikes, whereas if wages keep rising at the same pace or even slow down, that could make the Bank more hesitant to act.
So, what do gauges of the labor market suggest? The Markit UK Report on Jobs for December was rather optimistic on employment growth, noting that permanent staff placements increased at the quickest pace since August amid strong demand. Thus, this survey supports the forecast for the unemployment rate to remain unchanged, and even suggests that if there is any surprise in this number, it is more likely to be to the downside. As for wages, the Report noted that permanent starting salaries continued to rise markedly, and that temporary pay also increased at the quickest pace in three months.
Should the employment report come in stronger than expected, for instance with the unemployment rate surprisingly dropping or wages unexpectedly accelerating, that could amplify expectations for the BoE to raise rates again as soon as in May. At the time of writing, the probability for such an action is roughly 65%. Solid employment data may push that number higher and thus, support the pound. In this scenario, sterling/dollar could edge higher and test the 1.4050 territory, which is marked by the highs of February 19 and is also the 50% Fibonacci retracement of the January 25 – February 9 tumble. If buyers manage to overcome that zone, then resistance may be found near 1.4150, identified by the peaks of February 5.
On the other hand, softer-than-anticipated jobs data could diminish some speculation regarding a rate hike in May and hence, bring the pound under selling interest. In this case, sterling/dollar is likely to tumble and test the 1.3930 handle, marked by the lows of February 20. Even further declines after that could encounter support at around 1.3800, the February 14 low.
The UK will see the release of employment data for December on Wednesday, at 0930 GMT. While practically every indicator is projected to have remained unchanged from the previous month, this is still a major risk event for sterling, as any deviation from the forecasts will likely have a large impact on the currency’s forthcoming path.
According to forecasts, the UK unemployment rate is anticipated to remain unchanged at 4.3% in December, while average weekly earnings (both including and excluding bonuses) are projected to have risen at the same pace as previously. Assuming that the unemployment rate indeed holds steady, then investors will quickly turn their attention to the wage data for any surprises.
Wages are one of the most important indicators for any economy, but this statement is especially true in the case of the UK right now, considering the squeeze in real incomes that has taken place following the Brexit vote. To elaborate – inflation accelerated sharply due to sterling’s depreciation, but wage growth did not keep up the pace, instead remaining more or less flat. This has caused real income growth in the UK to turn negative as inflation outpaces wages, thereby “squeezing” the incomes of consumers. This is a risky situation to be in, as it could lead to a slowdown in consumption that results in a slowdown in the broader economy.
The negative real income growth is also one of the key reasons that have caused the Bank of England (BoE) to be particularly cautious about raising interest rates, as rapid rate hikes could exert downward pressure on wage growth and hence, make a bad situation even worse. In this context, markets will be looking to see whether the squeeze in real incomes is intensifying, or subsiding. In other words, if wages accelerate, that would probably give the “green light” for the BoE to proceed with more rate hikes, whereas if wages keep rising at the same pace or even slow down, that could make the Bank more hesitant to act.
So, what do gauges of the labor market suggest? The Markit UK Report on Jobs for December was rather optimistic on employment growth, noting that permanent staff placements increased at the quickest pace since August amid strong demand. Thus, this survey supports the forecast for the unemployment rate to remain unchanged, and even suggests that if there is any surprise in this number, it is more likely to be to the downside. As for wages, the Report noted that permanent starting salaries continued to rise markedly, and that temporary pay also increased at the quickest pace in three months.
Should the employment report come in stronger than expected, for instance with the unemployment rate surprisingly dropping or wages unexpectedly accelerating, that could amplify expectations for the BoE to raise rates again as soon as in May. At the time of writing, the probability for such an action is roughly 65%. Solid employment data may push that number higher and thus, support the pound. In this scenario, sterling/dollar could edge higher and test the 1.4050 territory, which is marked by the highs of February 19 and is also the 50% Fibonacci retracement of the January 25 – February 9 tumble. If buyers manage to overcome that zone, then resistance may be found near 1.4150, identified by the peaks of February 5.
On the other hand, softer-than-anticipated jobs data could diminish some speculation regarding a rate hike in May and hence, bring the pound under selling interest. In this case, sterling/dollar is likely to tumble and test the 1.3930 handle, marked by the lows of February 20. Even further declines after that could encounter support at around 1.3800, the February 14 low.
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