Pound shrugs as wage growth cools, US inflation next

• UK wage growth eases
• US inflation expected to fall to 3.3%

The British pound has edged higher on Tuesday. In the European session, GBP/USD is trading at 122.91, up 0.10%.

UK job growth improves, wage growth ease

The UK labour market remains strong, despite high inflation and elevated interest rates. The unemployment rate was unchanged at 4.2% in the three months to September, just below the market consensus of 4.3%. Wage growth excluding bonuses eased to 7.7% y/y in the three months to September, after a 7.9% gain in the previous two periods. This was the first decline since January and is an encouraging sign that inflation is moving lower.

The UK will release inflation data on Wednesday, with headline inflation expected to fall to 4.8% y/y in October, down from 6.7%. Core inflation is projected to fall from 6.1% to 5.8%. If inflation falls as expected, it will be easier for the Bank of England to pause for a second straight time at the December meeting and that would put pressure on the pound.

The US releases its inflation report later today and the release could provide insights as to the Fed’s rate path. Headline inflation is expected to rise 3.3% y/y in October, compared to 3.7% in September. The core rate is expected to remain unchanged at 4.1% y/y.

If inflation falls, it will support the market’s expectation for rates cutes in mid-2024 and the US dollar could lose ground. Conversely, a hot inflation print would support the Fed’s stance of ‘higher for longer’ and would push off expectations of a rate cut to later in 2024, which would be bullish for the US dollar. The markets expect the Fed to pause at the December meeting, with just a 14% chance of a quarter-point hike, according to the CME Group’s FedWatch Tool.

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GBP/USD Technical

• GBP/USD is testing resistance at 1.2281. Above, there is resistance at 1.2374
• 1.2175 and 1.2133 and are providing support

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