EUR/GBP – A step in the right direction for the UK but BoE will remain cautious

  • UK wage growth slows to 5.8% (inc bonus) and 6.2% (exc bonus) in December
  • CPI eyed tomorrow with UK expected to be confirmed as in recession on Thursday
  • EURGBP sell-off accelerates in key support zone

The UK is continuing to make progress toward being able to cut interest rates but as has been the case throughout the last couple of years, the process is far from straightforward.

The good news is that wage growth is slowing at a good pace after peaking last summer and near-term trends are very promising. The bad news is that the labor market remains very tight and it’s still highly uncertain whether wage growth will fall to a level consistent with 2% inflation soon.

Then there’s the unemployment rate which fell to 3.8% but is no longer reliable as a sole indicator. At a time when the BoE would like absolute clarity on the labor market, it’s left to piece together a variety of data and surveys to form a judgment. Not ideal when central banks everywhere are petrified to move too early and risk stoking inflationary pressures again.

This is the first major economic release for the UK this week with inflation to come tomorrow, GDP on Thursday, and retail sales on Friday. Ultimately the CPI data is what matters most but it would be handy if wage growth continues to slide between now and the May meeting if that is to be the live decision many expect it will.

The MPC will only have data up to March in time for the May meeting which is perhaps why markets are currently favoring a summer start for rate cuts.

Gathering sell-off momentum around major support zone

The pound is trading higher on the back of the release on the belief that today’s data is a small setback – wage growth not falling as much as expected and unemployment falling further. I don’t think today changes a great deal, wage growth is still cooling at a decent rate and the data over the next couple of months is arguably more important.

EURGBP Daily

Source – OANDA

EURGBP is trading in what has been an important support zone over the last 18 months and a breakout would be quite a bearish signal. The question is whether recent releases have been sufficient to be the catalyst for such a significant breakout or if it will need another nudge.

A look at the 4-hour chart below suggests the sell-off is gathering momentum rather than losing it which could be an interesting technical signal.

EURGBP 4-Hour

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Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam