This morning the Office for National Statistics released its latest estimates for the UK labour market. In short, it was another good report as it showed the number of people out of work fell to its lowest level in more than five years while jobless claims hit their lowest since October 2008. However the numbers were overshadowed by a weaker earnings growth which caused real wages to fall once again.
The unemployment rate fell to 6.6% in the 3 months to April, down from 6.8% previously. The fall was more than 6.7% expected. The number of people applying for unemployment benefit dropped by 27,400 in May to 1.09 million which not only was better than expected but was the lowest level since October 2008. However the data also revealed that the average weekly earnings rose just 0.7% in the three months to April. This was lower than 1.2% expected and down from the previous month’s gain of 1.7%. With the consumer price index measure of inflation currently running at 1.8%, real wages thus fell once again.
The weaker wage growth in the UK has been one of the reasons why the Bank of England has justified keeping monetary policy so lose during the recent economic upturn. The latest data therefore suggests they will most likely continue to hold rates steady, and this view may limit the potential upside for the Cable.
Technical view
At the time of this writing, the GBP/USD had already come off its high of 1.6795/7 that was achieved shortly after the jobs data were released. Incidentally, this level ties in with the 50-day moving average which has provided decent support and resistance in the recent past. There’s thus a chance the 50-day SMA may provide a ceiling for the Cable once again today, especially as there are no North American data scheduled for release later this afternoon.
But even if the GBP/USD climbs above the 50-day SMA, there’s a bearish trend line that also needs to be tackled. This comes in somewhere below the 50 percent retracement level of the last down swing at 1.6845. While the Cable remains below this area, it is possible we may see further losses especially as a longer-term bullish trend line was broken recently (price then found resistance upon testing the underside of this trend line around 1.6845 last week). The next levels of support are seen around 1.6740, 1.6700 and 1.6665 – the latter being the 61.8% Fibonacci retracement level of the last upswing.
However, a potential break above that 1.6845 level could lead to another leg higher, potentially towards 1.7000 in the short term. This key psychological level was missed by less than 5 pips last month, before a combination of long-side profit-taking and dollar strength led to a 300-pip decline. Although the trend has since weekend somewhat, as evidenced for example by the break of the bullish trend line, the fundamental outlook is still positive for the GBP/USD. As such, I maintain my bullish view on this currency pair and a break above 1.6845 would probably confirm this bias.
Figure 1:
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