GBP/USD: Longs in a bind if UK wage growth falls short of expectations

Sticky wage growth is one of the few positives for the British pound at the moment, keeping the Bank of England (BOE) concerned enough to consider more rate hikes given the strong correlations with services inflation.

The UK salary data is critical for short-term GBP/USD movements.

With employment statistics for July due later Tuesday, it’s an appropriate opportunity to look at recent salary patterns, especially with GBP/USD sitting at an interesting juncture on the charts.

In June, the UK Office for National Statistics (ONS) announced that earnings ex-bonuses increased 7.8% year on year, the highest amount ever reported since the series began in 2001. The gain exceeded the 7.4% projected, despite an unexpected jump in the UK unemployment rate to 4.2% as the employed labor force shrank by 109,000 in the previous three months.

Looking ahead to later today, wage growth is expected to slow, with experts projecting a 7.6% gain over the year and unemployment rising by a tenth to 4.3%. Markets will also hear speeches from BOE monetary policy committee (MPC) members Catherine Mann and Chief Economist Huw Pill, providing a real-time assessment that may change economists’ and markets’ expectations that the BoE will raise its bank rate to 5.5% later this month.

Data weakness may spark an acceleration of the GBP/USD selloff.

With financial markets pricing in another increase at around 80%, any new data indicating that wage growth and labor demand are cooling faster than expected might put the British pound under further selling pressure.

GBP/USD stays comfortably in the downtrend that it has been in since July. However, with the pair sitting just above its 200-day simple moving average at 1.2430 and having bounced off a long-running support and resistance line at 1.2460, a downside break of this zone could accelerate the current downtrend, paving the way for a push back to 1.2300, the 50% retracement of the June 2021 to October 2022 high-low range. The RSI and MACD are also not an impediment to further decline.

If the UK data is stronger than expected, the top of the trend channel might be tested, especially if the US dollar weakness witnessed on Monday continues into another session. If this occurs, it may present an opportunity to position for a trend change, but let’s not get too far ahead of ourselves.