The British pound saw a recovery in recent days, aided by a more conciliatory tone by the EU on Brexit. While political and Brexit developments will remain front and center, having the capacity to spur sharp and unexpected movements in sterling, this week will also bring noteworthy updates on the economic front, starting with the UK employment data on Tuesday at 0830 GMT.
Short bets on the British pound were scaled back over the past days, helping the battered currency to stage a comeback. Although this rebound is not so evident in sterling/dollar, given that the greenback has also gained broadly over the same period, one look at euro/sterling reveals that sentiment around the pound has changed considerably. These moves came on the back of a more conciliatory Brexit tone from EU chief negotiator Michel Barnier, who said the EU is ready to simplify checks at the UK-Irish border to help reach a solution, resurrecting hopes that the talks may ultimately bear fruit. Earlier today, he indicated that reaching a deal within 6-8 weeks is “realistic”, triggering yet another surge in the pound.
As always, incoming Brexit headlines are likely to remain the dominant force behind sterling-movements. That said, fresh UK labor market data due out on Tuesday could also play a role in shaping the currency’s near-term direction. In July, the nation’s unemployment rate is forecast to have remained unchanged at 4.0%, a low last seen in 1975. In terms of wage growth, average weekly earnings are projected to have grown by 2.4% in yearly terms, the same pace as in June, while the measure that excludes bonuses is anticipated to have picked up some speed to reach 2.8%, from 2.7% previously.
As for what the major gauges of the labor market suggest, the Markit UK Report on Jobs for July noted that “low candidate availability and robust demand for staff led to a further steep increase in salaries awarded to permanent starters”, supporting the wage growth projections. However, both this survey and the Markit services PMI reported a slowdown in the pace of job creation in July, which in isolation, suggests that the risks surrounding the unemployment rate forecast may be tilted somewhat to the upside.
Taking a technical look at sterling/dollar, further recovery in the pair could encounter immediate resistance around 1.3045, the territory that halted the advance on August 29. An upside break may see scope for extensions towards 1.3210, marked by the peaks of July 26, with even stronger bullish movements eyeing the 1.3290 area, the high of July 16.
On the downside, support to declines may be found near the 100-period moving average on the 4-hour chart, currently located at 1.2888. A downside break could open the way for the September 5 low of 1.2785, before the 15-month trough of 1.2660 comes into view. Even lower, the 1.2590 zone would attract attention, this being the low of June 20, 2017.
Besides the jobs data on Tuesday and potential Brexit updates, the pound will also be sensitive to any fresh policy signals by the Bank of England (BoE), which announces its rate decision on Thursday.
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