GBP/USD – A Bearish Red Flag?

UK labour market healthy as furlough scheme prepares to draw to a close

The pound slid following the release of the UK jobs report on Tuesday, despite the headline numbers looking broadly positive for the country.

The UK labour market looks in a very strong position as the furlough scheme continues to be phased out. The data today is very encouraging, from the drop in the headline unemployment rate to the payrolls.

Vacancy numbers are generally a positive, although as we’ve seen for some time, a labour shortage has been problematic for business and any significant impact on wages could create problems for the Bank of England.

We shouldn’t get too carried away with the earnings data at this point, though, with it being largely due to the base effects, as millions saw wages or hours reduced last year following the introduction of the furlough scheme.

With the furlough scheme ending next month, we’ll soon know the full effects of the pandemic on the labour market but the expectation is that it will be far less signficant than feared.

Despite the data appearing encouraging, the pound tumbled after the release and now sees itself approaching some major support levels.

What concerns me about this is that some seemingly good data preceded a drop in the currency. While this may not be a bearish signal, in itself, it’s at least a red flag that casts doubt on its ability to rebound.

The key level below remains the 1.3650 region, which is the lower end of the 200/233-daily SMA band which has supported the pair during its ascent. A move below here would be a very negative development.

Prior to this, 1.3730 will be an interesting test of support, being the 61.8% retracement of the July lows to highs.

Should the pair rally, 1.38 could be the first test of resistance, with it having provided support over the last week.

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