Pound sinks on soft UK labour report; FOMC minutes in focus

February 21, 2018 08:57 AM

Investors wasted no time in attacking the Pound on Wednesday, after data showed Britain’s unemployment rate ticked higher for the first time in nearly two years.

The Office for National Statistics reported that the rate of unemployment rose from 4.3% to 4.4% in the three months to December. Although average weekly wage growth increased by 2.5%, this was broadly in line with market estimates, ultimately offering little support to Sterling. Today’s soft UK labor report has somewhat diluted expectations of a rate hike, and such is reflected in the Pound’s bearish price action.

Market players will now direct their attention towards the inflation report hearings this afternoon, where Bank of England Governor Mark Carney will testify before the Parliament Treasury Committee. The testimony could offer a rare opportunity for investors to assess how committed the Bank of England is to raising UK interest rates this year. With the Pound quite sensitive to monetary policy speculation, comments from Carney and co. during this afternoon’s testimony have the ability to create fireworks.

Focusing on the technical picture, the British pound/U.S. dollar (GBP/USD) currency pair remains exposed to further losses below the 1.4000 resistance level. It is becoming increasingly clear that sustained weakness below 1.4000 could open a path lower towards 1.3850. For bulls to jump back into the game, the 1.4000 level needs to be breached to the upside.

Dollar higher ahead of FOMC meeting minutes

Wednesday’s main event risk for the Dollar will be the release of January’s FOMC meeting minutes, which is likely to be closely scrutinized for clues on rate hike timings beyond Q1 of 2018.

With U.S. job growth solid in January, wages increasing further and inflation rising, expectations have intensified over the Federal Reserve raising U.S. interest rates in March. There is a strong possibility that the minutes will signal a March hike and as such, could offer the Dollar further support. Investors are likely to closely scrutinize the meeting minutes for fresh insight on the Federal Reserve’s views on inflation and fiscal policy.

With the dollar also falling into the category of currencies that have become sensitive to monetary policy speculation, further upside could be on the cards if the minutes are packaged with a hawkish touch. Alternatively, a surprise appearance by doves could negatively impact the Dollar Index.

Speaking of the Dollar Index, prices ventured higher towards 90.00 during Wednesday’s trading session. A decisive daily close above 90.00 could invite an incline higher towards 90.55. A situation where bulls are unable to break above 90.00 could result in a decline back towards 89.50.


About the Author

Lukman Otunuga is an FXTM research analyst