GBP/USD loses ground, markets eye UK employment and US CPI data

• There are no UK or US tier-1 releases on Monday
• On Tuesday, UK releases jobs data and BoE’s Bailey testifies before House of Lords committee
• US releases inflation data on Tuesday, with Fed rate announcement on Wednesday

The British pound has started the week quietly. Tuesday promises to be busy, with key releases on both sides of the pond. The UK releases May employment data and Bank of England Governor Bailey testifies before a House of Lords Committee. In the US, the markets are anxiously awaiting Tuesday’s inflation report, which comes just one day before the Fed rate announcement.

UK jobs numbers could point in different directions

The UK labour market has proven resilient to the BoE’s aggressive tightening cycle. This has become too much of a good thing for the BoE, as inflation remains stubbornly high, although it did fall to 8.7% in May, down from 10.1% in April. The good news for the BoE is that the labour market appears to be cooling, and that should help reduce inflation.

The markets are expecting mixed numbers in May. The unemployment rate is expected to rise from 3.9% to 4.0% and employment change is projected to fall from 182,000 to 150,000. At the same time, wage growth including bonuses is expected to rise from 5.8% to 6.1% and unemployment claims are expected to drop. If the data turns out to be a mixed bag, it will be interesting to see Governor Bailey’s take when he testifies before the House of Lords committee.

In the US, inflation is expected to continue to ease in May. Headline inflation is expected to fall from 4.9% to 4.1%, and the core rate is projected to ease from 5.5% to 5.3%. Market rate pricing is swinging, with the probability of a pause rising from 70% on Friday to as high as 80% earlier today, according to the CME’s FedWatch. We can expect the Fed to take a pause after ten straight rate hikes, unless there is a huge inflation surprise to the upside.

If the Fed stays on the sidelines, the markets will be looking for clues as to what happens next. The Fed may decide to pause on Wednesday but leave the door wide open for further rate hikes, as early as in July. There seems to be some support amongst Fed members for more tightening, and a pause tomorrow may turn out to be a short skip ahead of more rate increases in the second half of the year.

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GBP/USD Technical

• There is resistance at 1.2645 and 1.2734
• 1.2513 and 1.2436 are providing support

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