GBP/USD volatile after UK jobs, US inflation data

It has been a hectic day for the British pound, after key releases on both sides of the pond. In Tuesday’s North American session, GBP/USD is trading at 1.2594, down 0.26%. The pound edged higher after the UK employment report but dropped sharply after US inflation was higher than expected.

UK employment and wages fall

The UK employment report indicated that the labour market is cooling but remains strong. Employment change rose 72,000 in the three months to December, down from a revised 108,000 a month earlier and just shy of the market estimate of 73,000. Average earnings including bonuses fell to 5.8%, down from a revised 6.7% but above the market consensus of 5.6%.

The Bank of England will be paying particular interest to the wage growth numbers. The decline in wages will be welcome, as it is a driver of inflation, but the current rate of wage growth is much too high as it is incompatible with a 2% inflation target.

The UK releases inflation data on Wednesday, with CPI expected to rise from 4% to 4.2% and core CPI projected to inch up to 5.2%, up from 5.1%. A rise in the inflation rate would be disappointing for the BoE and would likely lower market expectations for a rate cut.

Hot US inflation sends dollar higher

The British pound climbed 0.25% after the UK employment report, but headed south after the US inflation report and declined by 0.65%. The US dollar posted strong gains against all the major currencies after January’s inflation report indicated that inflation was hotter than expected.

US CPI rose 3.1% y/y in January, down from 3.4% in December but higher than the market estimate of 2.9%. Core CPI remained unchanged at 3.9%, above the market estimate of 3.7%.

The Fed has been pushing back against market expectations for a rate cut in March, and the hotter-than-expected inflation release lowered the odds of a March cut to just 4%, compared to 16% prior to the release, according to the CME FedWatch tool. The markets have widely priced an initial rate cut for June but strong US data could mean a rate cut as early as May.

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GBP/USD Technical

• GBP/USD tested support at 1.2597 and this line remains under pressure. Below, there is support at 1.2550
• There is resistance at 1.2676 and 1.2723

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