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GBP/USD Technical Analysis: Preparing for New Selling – 17 August 2022

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Sterling received support near recent levels against the euro and dollar after new data from the Office for National Statistics showed UK wages were faster than expected in June, with job openings remaining high in a low unemployment environment. The GBP/USD pair collapsed towards the support level 1.2007 before settling around the 1.2090 level at the time of writing the analysis, before the announcement of the British inflation figures, and most importantly the content of the minutes of the last meeting of the US Federal Reserve.

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Office for National Statistics said average earnings in the UK with built-in bonuses up 5.1% up from the 4.5% the market was looking for, but down from 6.2% in May. Average wages, excluding bonuses, rose 4.7% in June, ahead of the expected 4.5%, and up 4.3% in May. While earnings are still well below inflation, the BoE is likely to remain inclined to continue raising interest rates as wage adjustments remain high compared to long-term trends.

Commenting on the figures, Ruth Gregory, chief UK economist at Capital Economics said: “This is stronger than the 4.5% rate we have assumed and the consensus. With wage growth well above 3.0-3.5% rates which are in line with the 2% inflation target, this supports our view that the BoE will. It should raise interest rates more than expected to 3.00%.”

Simon Harvey, head of forex analysis at Monex Europe, says: “Another UK labor market report shows no conclusive evidence that the recession appears to be easing wage pressures. This does not bode well for the Bank of England which is actively looking for a weaker consumer background.”

The country’s unemployment rate remained at 3.8% in June, as the number of employed people aged 16 and over in the quarter increased by 160,000. The associated employee estimate for July 2022 shows a monthly increase, 73,000 more than the revised June 2022 numbers, to a record 29.7 million. The UK employment rate for people aged 16-64 fell 0.1 percentage point in the quarter to 75.5%, indicating more people are returning to the job market. Indeed, the Office for National Statistics has noted a decline in numbers classified as economically inactive.

The data has been strong and consistent with the trends of recent months, and thus does not necessarily change the rules of the game for the British Pound. However, it is strong enough to protect against heavy selling. “Even with the alternation of self-employment allowed and the recent decline in real wages, this is an impressive recovery for the UK labor market,” says Simon French, chief economist at Panmore Gordon.

Where is unemployment headed?

Looking ahead, the unemployment rate is likely to start rising and wage pressures to subside as the supply of labor in the market increases in line with rising levels of immigration and a halt in job vacancies. The number of job vacancies fell by 19.8 thousand in the August quarter to 1.27 million, the first quarterly decline since 2020. It was very encouraging to see the size of the workforce, says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. Non-UK nationals rebound in the three months to June, offsetting the persistent weakness in the local labor supply. Pantheon Macroeconomics expect the unemployment rate to start rising as the labor supply increases, relieving pressure on wages and prompting the BoE to consider ending the interest rate raising cycle.

Sterling Dollar Technical Analysis:

GBP/USD appears to be ready for another leg down, as the pair formed a double top pattern on the four-hour time frame. The price is already testing the neckline around the 1.2000-1.2050 region, and a break below would confirm selling. GBP/USD could slide as high as the chart pattern or close to 250 pips. Note, however, that technical indicators point to a continuation of the rally.

For example, the 100 SMA is above the 200 SMA to indicate that the trend has a chance to go up and that support is more likely to hold rather than a breakout. The 200 SMA appears to be holding as a dynamic support, possibly sending GBP/USD to higher levels around 1.2250. The stochastic is indicating oversold or exhausted levels among sellers, so a shift to the upside means buyers are ready to take over. The RSI has a bit more room to go lower before indicating that the sellers need a break, but the oscillator is approaching oversold territory as well.

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