GBP / USD driven by strong UK employment data, but can’t beat key downtrend for now

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  • GBP / USD has retraced from initial highs after encountering resistance in the form of a key downtrend.
  • Wednesday’s UK CPI report, if much warmer than expected, could provide GBP / USD with the tailwinds it needs to break to the upside.

Amid a broad recovery in the fortunes of the US dollar following strong industrial production and retail sales figures on Tuesday, the pair GBP/USD it has fallen back from the previous session’s highs at 1.3470 and has returned to trading at 1.3430. At the start of the European trading session, the pair had risen as much as 0.5%, driven by a strong labor market report that many analysts said gave the Bank of England the green light to raise rates in December. While the pair has retraced from highs, it is still holding gains of around 0.2% on the session and is currently the best performing currency in the G10.

While overall USD strength is probably the main reason why GBP / USD pulled back from previous highs, technical selling probably played a role as well. GBP / USD appeared to test and reject a downtrend line that has been limiting price action since late October. Whether or not the pair can break above this trend line and regain some lost ground may depend on how the consumer price inflation (CPI) report on Wednesday October fares.

The latest jobs report showed employers’ payrolls grew by 160,000 in October, easing concerns about an end to the health of the UK job market that prevented the Bank of England from raising rates in November. Wednesday’s CPI report, if it comes in much higher than expected as was the case in the US last week, could exacerbate inflation concerns at the bank, thereby boosting market expectations of a policy response. more aggressive.

The future market prices of the short term interest rate in GBP (STIR) have gradually become more aggressive in recent days. In the wake of the mild November surprise from the Bank of England, December 2022 sterling futures rallied from below 98.70 to above 98.90. In other words, markets suddenly went from expecting more than 120 bps of adjustment by the end of 2022 to less than 100 bps. But the December 2022 sterling LIBOR futures have quietly dropped to pre-Bank of England levels in recent days, and Tuesday’s jobs report sent it below 98.70.

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