Can the UK Data Splurge Save Sterling?

Written on 17/05/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

Sterling should come with some sort of health warning. This morning, it is the turn of the bears to take a bruising after sellers were looking to push GBP/USD down to another round number and 1.20. This morning’s strong set of UK employment data has helped propel the pound higher and we get the all-important inflation figures out early tomorrow.

Red-hot labour market

It’s the middle of the month so that means a UK data deluge. First up were today’s jobs numbers which saw unemployment fall to its lowest level in nearly half a century in the first quarter of 2022. The jobless rate stood at 3.7% with fewer people out of work than there were job openings for the first time on record. Hiring demand remains solid and a lack of workers means wage growth is running a little faster than it was before the pandemic.

Amid all the headlines, the scorching labour market may start to cool as the squeeze on household incomes deepens. It is also important to note that the Bank of England recently forecast that the unemployment rate could rise above 5% in the next two years. So, upcoming employment reports will be important as they inform on increasing recession risks to the economy.

CPI on a tear to 9%+

We may get even bigger headlines tomorrow with the release of inflation data for April. Consensus sees a huge jump in the headline figure to 9.1% y/y from 7% in March. It is going some when a miss on the data could still print at 9% for headline CPI. The main culprit for the surge is the massive 54% energy price hike by the UK energy regulator (Ofgem). This is really a symptom of the energy crisis in Europe due to surging wholesale market prices surpassing the caps and driving several suppliers to the wall.

Key for markets will be the size of the relative price shock to household’s energy bills. The BoE has already warned of 10% inflation into autumn later this year. This is expected to dampen discretionary household spending and crowd out some pricing power in other part so the economy. Indeed, this could show up in the retail sales numbers that are released on Friday.

Sterling bounces hard

Governor Bailey added to the more positive sentiment around the pound by sounding more combative yesterday on fighting inflation. This was in contrast to the recent BoE meeting and the focus on the grim growth outlook. His emphasis was clearly more on runaway inflation and the tight labour market at his testimony. This has helped solidify rate hike hopes for a 2% policy rate by the end of the year. Cable needs to close above 1.25 to fend off more selling. Any consolidation would then need to advance beyond the month-to-date top at 1.2638.

For a look at all of today’s economic events, check out our economic calendar.

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