GBP/USD justifies fears about UK employment, growth around 1.2750, focus on UK GDP, US inflation

• GBP/USD fades late last week’s corrective bounce but lacks follow-through.
• Early signals of UK employment, growth flag concerns about British economy ahead of Q2 GDP.
• BoE’s inability to please Pound Sterling bulls with rate hikes, mostly upbeat US data tease sellers.
• Hawkish Fed talks, cautious mood before US inflation gauges also weigh on Cable pair.

GBP/USD justifies market’s fears about UK employment and growth conditions as it retreats to 1.2745 amid Monday’s sluggish Asian session, following a three-week downtrend. In doing so, the Cable pair also justifies hawkish bias about the Federal Reserve (Fed), as well as the Bank of England’s (BoE) failure to please optimists despite fueling interest rates to multi-year high. Furthermore, a cautious mood ahead of the first readings of the UK’s second quarter Gross Domestic Product (GDP) and the US inflation numbers also keep the Pound Sterling sellers hopeful.

The latest outcome of the UK’s Recruitment and Employment Confederation (REC), funded by the global quant giant KPMG, revealed downbeat employment conditions in Britain due to the economic pessimism. “British employers reduced the number of new permanent staff they hired through recruitment agencies by the most since mid-2020 last month due to concerns about the economic outlook,” said the KPMG/REC poll.

In the last week, the Bank of England (BoE) matched market forecasts by lifting the benchmark interest rates to the highest level in 15 years with a 0.25% increase to 5.25%. However, the policymakers appear divided with most favoring the latest move and a few backing a 0.50% rate hike while one BoE voting member backed no rate hike.

Following the BoE Interest Rate Decision, Governor Andrew Bailey spoke at the press conference and ruled out the case for a 50 basis point rate rise in the latest meeting. Further, BoE Governor Bailey also conveyed expectations of witnessing softer inflation, as well as the hopes to deliver the path they expect with no recession while adding, “We will have to see." It’s worth noting that BoE Governor also mentioned, “Projection for economic activity has weakened since May.”

The same contrasts with the recently hawkish comments from Federal Reserve (Fed) Governor Michelle Bowman as she said during the weekend that the Fed should remain willing to raise the federal funds rate at a future meeting if the incoming data indicate that progress on inflation has stalled. Previously, Atlanta Federal Reserve Bank President Raphael Bostic said on Friday to Bloomberg, that the central bank is likely to keep monetary policy in a restrictive territory well into 2024. On the contrary, Chicago Fed President Austan Goolsbee stated that they should start thinking about how long to hold rates.

It should be noted that the US employment report posted a softer-than-expected Nonfarm Payrolls (NFP) figure of 187K, versus 185K prior (revised) and 200K market forecasts, whereas the Unemployment Rate eased to 3.5% from 3.6% expected and previous readings. Further, the Average Hourly Earnings reprinted 0.4% MoM and 4.4% YoY numbers by defying the expectations of witnessing a slight reduction in wage growth.

Also notable is the fact that the ISM Manufacturing PMI for July improved a bit but the more important Services PMI dropped for the said month. Additionally, US Factory Orders edged higher for June and so did the second-tier employment-linked data like Nonfarm Productivity and JOLT Job Openings. However, the Q2 Unit Labor Cost eased and troubled favoring the Fed’s September rate hike.

Additionally, the market’s bets on the Fed’s September rate hike eased from 20.0% to 13% on a weekly basis, per the CME’s FedWatch Tool.

To sum up, the fears of the UK’s economic slowdown and labor market crunch weigh on the Cable pair ahead of the top-tier data/events. It’s worth noting that the latest easing in the US Treasury bond yields, however, puts a floor under the Pound Sterling as this week’s US inflation numbers, namely the Consumer Price Index (CPI) and Producer Price Index (PPI) for July loom.

Technical analysis

A three-week-old descending trend channel, currently between 1.2850 and 1.2600, keeps the GBP/USD sellers hopeful amid bearish MACD signals and steady RSI (14) line.