British pound extends rally after mixed employment report

• UK employment falls but wage growth remains high
• BoE Governor Bailey says inflation will fall but more rate hikes needed

The British pound has edged upward on Tuesday. In the European session, GBP/USD is trading at 1.2898, up 0.28%. The pound has put on an impressive rally, rising close to 200 pips against the dollar since Thursday.

UK employment softens, wages rise

The UK delivered a mixed employment report for June. The economy created 102,000 jobs, far less than the 250,000 in May and shy of the consensus of 125,000. The unemployment rate rose from 3.8% to 4% and unemployment claims rose by 25,700, after a decline of 22,500 in May. However, wage growth excluding bonuses remained at 7.3% in the three months to May, above the consensus estimate of 7.1%.

For Bank of England policymakers, the employment report is a good news/bad news release. The central bank needs the labour market to cool as it struggles to bring inflation down. To put it mildly, that battle has not gone as planned, with the OECD giving the UK the ignominious distinction of being the only major economy where inflation is rising. The June employment and unemployment numbers showed some cracks in the tight labour market, but wage growth, a key driver of inflation, remains stubbornly high.

The takeaway from the jobs report is that the labour market is a bit less tight but wage growth remains inconsistent with the 2% inflation target and the BoE will have to continue to tighten policy. The cash rate is currently at 5.0% but the money markets have priced in a peak rate of 6.5%, which means that more pain is coming for businesses and households in the form of higher interest rates.

BoE Governor Bailey is doing his best to put a brave face on a difficult situation. On Monday, Bailey said that inflation would fall “markedly” due to falling energy and food prices, but more rate hikes would be needed to bring inflation down from the current 8.7% to the 2% target.

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GBP/USD Technical

• GBP/USD tested support at 1.2782 earlier today. The next support level is 1.2716
• There is resistance at 1.2906 and 1.2972

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