Why the pound is falling despite impressive wage growth

The pound hit fresh 6-month lows in early trade and is moving to test $1.24, despite an impressive labour market report.

There was a lot to like in the report. Whilst unemployment remained steady at the multi-decade low of 3.8%, wages grew at the fastest pace since 2008. Basic pay increased 3.6% in the three months to May, comfortably outpacing inflation at 2% and employment levels hit a record high.

With the jobs market looking so robust, the assumption would usually be that, the more jobs and higher wages would boost spending, supporting economic activity. These are of course not usual times. Data earlier in the month such as service sector pmi and BRC retail figures have indicated that higher wages are not being reflected at the tills, as Brexit uncertainty is keeping consumers from spending.

However, the main source of the pound’s pain this morning is from Brexit and the returning fear of a no deal. The pound slumped to 2019 low’s in reaction to both remaining candidates in the Conservative leadership race, Boris Johnson and Jeremy Hunt opposing the Irish backstop. This dramatically reduces the chances of a no deal Brexit. Both have recently hardened their rhetoric on Brexit. Negotiations will undoubtedly grow more hostile under the next prime minister.

Money markets are pricing in 50% chance of a BoE rate cut before the end of the year. This is owing to the growing risk of the UK crashing out of the EU without a deal. This could be interpreted as the markets now pricing in a 50/50 chance of a no deal Brexit.

Up next:
Attention will now turn to BoE Governor Mark Carney scheduled speech. This could influence market expectations over central bank policy, potentially injecting volatility into the pound.
Strong US corporate earnings are lifting the dollar. US retail sales could also keep the dollar buoyed. After the surprisingly upbeat US NFP and tick higher in inflation, better than forecast retail sales wouldn’t be entirely surprising.

GBPUSD levels to watch:
GBP/USD is down 0.8% its third straight session of losses. The pair is down 1.3% across the week so far. The pair trades firmly below its 50, 100, 200 sma showing signs of strong bearish momentum.
Having broken through resistance at $1.2440, the pair is looking to test $1.24. A breakthrough here could open the door to $1.2370.
On the upside, the key resistance sits at $1.25. A breakthrough here could lead to $1.2575.

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.