Pound calm ahead of inflation data

The British pound had moved higher on Tuesday, as GDP/USD trades at 1.3253, up 0.30% on the day.

UK jobs posts sharp job data

UK employment numbers were solid on Monday, although the pound still lost ground. Unemployment rolls continue to drop, with the November reading coming in at -49.8 thousand. The unemployment rate dropped to 4.2% in the three months to October, down from 4.3% a month earlier. Wage growth came in at a strong 4.9%. What is noteworthy about the employment report is that unemployment has been falling despite the end of the job furlough programme. This points to a continuing recovery in the labour market. Still, the employment picture is not all rosy. There is growing concern that job growth is stalling, due to the rapid spread of the Omicron variant. If the government introduces more severe health restrictions, that will translate into closures and unemployment will rise.

The BoE is in a tough spot ahead of the policy meeting on Thursday, and it remains uncertain whether the bank will raise rates. An improving labor market and high inflation are supportive of a rate hike. The Fed has given up on labeling inflation as “transitive”, and one would assume that the BoE agrees that such is the case with UK inflation, even if they haven’t come out and admitted it. Still, the potential impact of the Omicron variant remains the elephant in the room and there is about a 60% likelihood that the BoE will stay pat and maintain the 0.10% cash rate. If the bank does press the rate trigger, it would likely raise the cash rate by 15 bps, to 0.25%.

All eyes are on the FOMC policy meeting on Wednesday. In November inflation rose 6.8% y/y, the highest in 40 years. This makes it likely that the Fed will announce that it will double the pace of its taper, to US 30 billion/month. This means we can expect a rate hike in mid-2022, if not earlier. Investors will be paying close attention to the dot plot, which is expected to indicate that policymakers have become more hawkish in recent months.

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GBP/USD Technical Analysis

• GBP/USD has support at 1.3190 and 1.3116
• There is resistance at 1.3314 and 1.3364

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