GBP/USD rallies into upper 1.24s post-strong UK jobs data, eyes 21DMA in 1.25s despite rising Brexit risk

• GBP/USD has rallied to the upper 1.2400s and is eyeing its 21DMA in the 1.2530s after strong UK jobs data.
• But the Fed’s relatively more hawkish stance versus the BoE and rising Brexit risks may make further upside difficult.

Recent concerning headlines highlighting the rising risk that a spat over the Northern Ireland border into a fully-fledged trade war between the UK and EU has failed to dent sterling optimism, with GBP/USD holding in the upper 1.2400s for now as traders digest the implications of a super strong UK labour market report released earlier in the session. The pair has also shrugged off a just-released, stronger than expected US Retail Sales report for April, perhaps as it continues to also find support from a more buoyant tone to risk appetite on Tuesday.

For reference, the latest UK labour data revealed the unemployment rate falling to its lowest since 1974 at 3.7% in the three months to March, below the expected 3.8%. Meanwhile, wages were up 7.0% YoY in March, well above the expected gain of 5.4%, which will ease some concerns about the vulnerability of consumers amid the ongoing cost-of-living squeeze. Analysts said the latest labour market data will encourage the BoE to continue lifting interest rates at upcoming meetings. Another 25 bps rate hike is expected from the bank in June.

At current levels in the 1.2480s, GBP/USD trades with gains of about 1.3% on Tuesday and is now over 2.5% higher versus last week’s multi-month sub-1.2200 lows. Bulls will now be eyeing a test of the pair’s 21-Day Moving Average in the 1.2530s, but it is notable that this level has offered significant resistance in recent weeks. Fed speakers continue to remind us (John Williams on Monday, James Bullard just now and plenty more later on Tuesday) to expect significant further Fed tightening in the quarters ahead as the bank races to tame inflation.

The Fed is expected to raise rates by 50 bps at its next at least two meetings (maybe three), meaning that even if the latest UK labour market data does ease some of the BoE’s fears about UK economic weakness, the Fed is set to retain a decisive monetary policy tightening advantage. That, alongside rising Brexit risks, caps GBP/USD upside and suggests the 21DMA may prove an important resistance level once again. The UK on Tuesday announced plans to introduce legislation that would unilaterally alter the Northern Ireland Protocol, much to the consternation of the EU.