Is UK Labor Market Cool Enough for BoE?

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Summary:

The UK labor market is cooling, showing an increase in claims from claimants.

The UK labor market is cooling, showing an increase in claims from claimants. In addition, wage growth is slowing. The data provided further evidence that the UK economy has moved into a new phase of the economic cycle, although the inflation genie remains at large.

In November, the number of people receiving benefits rose by 16K to 1575K – the highest since April 2022. The UK labor market is cutting jobs more actively, a reversal after a plateau between September last year and February this year. Is UK Labor Market Cool Enough for BoE?_1

Is UK Labor Market Cool Enough for BoE?_1

Meanwhile, wages continue to contribute to inflation, adding 7.2% in the August-October period to the same period a year earlier. The rate of wage growth is down 1.3 percentage points from a peak of 8.5% four months ago, although it remains notably above the consumer inflation rate of 4.6% y/y.

Is UK Labor Market Cool Enough for BoE?_2

On the one hand, the Bank of England has seen slowing inflation and there are growing signs of a cooling labor market, supporting the sentiment that it will reach a plateau and that the next move after a prolonged pause will be lower.

On the other hand, both price and wage growth rates have been held at elevated levels for an extended period (3 years for wages and over two years for inflation), working to raise inflation expectations and making returning to the norm more difficult.

And this divergence creates intrigue ahead of the Bank of England's looming meeting on Thursday. If the Bank of England acts based on hard data, it should remain in inflation-suppressing mode, warning it is ready to raise rates to bring inflation back on target more quickly.

However, major peers – the ECB and the Fed – are signaling that they are done with hikes and have moved into a 'wait-and-see' mode, and the Bank of England may announce the same shift in two days.

The GBP/USD pair retreated towards 1.25 at the end of last week, approaching its 200-day average from above. This week, the battle for the long-term trend has every chance of intensifying, and a bull or bear victory could signal a lasting signal of further Pound movement. A consolidation under 1.25 opens a quick path to 1.22 or even 1.2060. The ability to hold above due to a strong economy or a hawkish stance from the Central Bank will kick-start a growth momentum with a quick update to 1.27 and the potential to rise above 1.30 before the end of Q1. Is UK Labor Market Cool Enough for BoE?_3

Is UK Labor Market Cool Enough for BoE?_3

To stay updated on all economic events of today, please check out our Economic calendar

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EUR/USD muted ahead of U.S. inflation data release

EUR/USD continues to range trade in low volatility ahead of Tuesday's U.S. Consumer Price Index (CPI) release for November which is forecast to come in at 3.1% versus 3.2% previously and at 4% for core inflation.

While last week's low at $1.0724 underpins, Friday's high at $1.08 is likely to be exceeded with Thursday's high and the 200-day simple moving average (SMA) at $1.0817 to $1.0826 then being eyed. Further up the 22 November low at $1.0853 may also act as resistance, were it to be reached at all.

A fall through $1.0724 would probably put the 55-day SMA and late-October high at $1.0699 to $1.0695 on the plate, though. EUR/USD, EUR/GBP and GBP/USD Outlook Ahead Major Central Bank Meetings_1

EUR/USD, EUR/GBP and GBP/USD Outlook Ahead Major Central Bank Meetings_1

EUR/GBP sideways trades above this week's £0.8550 low

EUR/GBP's drastic decline from its six-month high at £0.8766, amid the European Central Bank's (ECB) less hawkish stance than that of the Bank of England (BoE), has so far taken it to a three-month low at £0.855.

Further sideways trading in low volatility is expected to be witnessed over the coming days, with Tuesday's lower-than-forecast wage growth not making a dent. Only a rise above last week's high at £0.8588 could lead to the mid-October low at £0.8617 being revisited. Together with the £0.865 early-November low it is expected to act as resistance, though, if reached at all that is.

Failure at £0.855 would put the July and August lows at £0.8504 to £0.8493 back in sight. EUR/USD, EUR/GBP and GBP/USD Outlook Ahead Major Central Bank Meetings_2

EUR/USD, EUR/GBP and GBP/USD Outlook Ahead Major Central Bank Meetings_2

GBP/USD range trades ahead of U.S. CPI reading

GBP/USD's slip from last week's near three-month high at $1.2733, on a strengthening U.S. dollar amid solid U.S. Non-Farm Payrolls, took it close to the 200-day SMA at $1.2493 which continues to underpin.

While it holds, minor resistance around the end of November $1.2604 low may be reached ahead of Tuesday's U.S. inflation data release.

Further minor resistance can be found around last Tuesday's $1.2651 high. EUR/USD, EUR/GBP and GBP/USD Outlook Ahead Major Central Bank Meetings_3

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Dollar retreats ahead of CPIs and Fed

The US dollar traded lower or unchanged against the other major currencies on Monday except the Japanese yen, which continued to slide. Today, the greenback is trading on the back foot against all, with the yen recovering a decent portion of its Monday losses.

Dollar traders are likely sitting on the edge of their seats in anticipation of the US CPI numbers, just a day before the Fed announces its last monetary policy decision for the year. The headline rate is forecast to have ticked down to 3.1% y/y from 3.2%, and the core one to have held steady at 4.0% y/y.

On Friday, the US jobs report beat estimates on all fronts, prompting market participants to push back their rate cut expectations. The probability for a first quarter-point reduction to be delivered during the first quarter of the new year is now that of a coin toss, but a May cut is a certainty in the eyes of the market. Under normal circumstances, a further slowdown in inflation could have tempted some participants to bring forth their cut bets again, but with the core rate holding at double the Fed's objective and the Committee announcing its policy decision on Wednesday, they may avoid bold changes.

They may be more eager to find out what's the new rate path projected by the Fed for the new year and what Fed Chair Powell has to say at the press conference. When he last spoke, he did not close the door to another hike and refrained from discussing rate reductions. However, given that Powell pays close attention to inflation expectations, and that the calculations of the 1-year expectations from both the University of Michigan and the New York Fed suggest further softening, it would be interesting to see whether Powell has leaned to a more dovish stance or not.

Yen remains sensitive to headlines about the BoJ's plans

Following the Reuters report on Friday that Governor Ueda's latest remarks on policy-exit options were not intended to hint at a potential exit timing, another report came to hurt the yen on Monday. This time it was a Bloomberg report saying that the BoJ sees little urgency to end negative interest rates this month.

The sources cited added that BoJ officials are of the view that the potential cost of waiting for more information to confirm solid wage growth is not very high. This could mean that the BoJ's upcoming gathering is unlikely to hint at an imminent shift and may just be a reiteration of the stance revealed last time.

Having said that though, the yen is holding top spot today against the other major currencies, suggesting that dollar/yen may be among the most volatile pairs after the Fed announces its decision.

Wall Street extends rally, gold slides despite softer dollar

Wall Street continued marching north on Monday, with all three of its main indices closing at new highs for the year. Although Friday's better-than-expected jobs data prompted investors to push back their rate cut bets, equities may have remained in an upside trajectory due to the data reviving hopes of a soft landing for the US economy. Decelerating inflation, expectations of lower rates, and reduced fear that the economy could fall into recession appear to be a positive blend for the stock market.

Gold lost more than 1% yesterday, despite the US dollar pausing its rally ahead of the upcoming key events. Perhaps the precious metal is still correcting its prior rally that led it to new record highs. Nonetheless, calling for a bearish reversal is still premature as should investors continue to anticipate several rate cuts by the Fed next year, the current retreat may encourage them to buy gold again at a better price with a better risk-to-reward outlook.

To stay updated on all economic events of today, please check out our Economic calendar

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Samantha Luan

Forex

Economic

The British pound is drifting on Tuesday. In the European session, GBP/USD is trading at 1.2551, down 0.04%.

UK wage growth falls to 7.3%

Tuesday's UK employment report was notable for the decline in wage growth. Earnings excluding bonuses rose 7.3% in the three months to October, down from 7.8% in the three months to September. This was lower than the consensus estimate of 7.4%.

Wage growth is an important driver of inflation and the decline is an encouraging sign for the Bank of England. Still, earnings are rising much faster than inflation, which suggests that the BoE won't be cutting interest rates anytime soon. Inflation has fallen to 4.6%, but this is more than double the Bank's target of 2%.

The BoE will announce its latest rate decision on Thursday and is widely expected to hold the cash rate at 5.25%. Governor Bailey has warned that rates could remain in restrictive territory for an extended period, but the markets are marching to a dovish tune and have priced in three rate cuts in 2024. Bailey has come out against expectations about rate cuts and we could see the BoE push back against rate cut speculation at the Thursday meeting.

US inflation expected to ease to 3.0%

The US releases November CPI later today, with a consensus estimate of 3.0% y/y, compared to 3.2% in October. Monthly, CPI is expected to remain flat, unchanged from October. Core CPI, which has been running higher than the headline rate, is projected to remain unchanged at 4.0% y/y. Monthly, the core rate is expected to inch higher to 0.3%, up from 0.2% in October.

The Fed is widely expected to hold rates at a range of 5%-5.25% at the Wednesday meeting, but the inflation release could be a key factor as to what the Fed does in the upcoming months. There is a major disconnect between the markets, which have priced in four rate cuts in 2024, and the Fed, which is insisting that the door remains open to further hikes. A strong inflation report could chill market expectations for rate hikes, while a soft inflation release will provide support for the market stance and could force the Fed to reconsider its hawkish position.

GBP/USD Technical

GBP/USD is putting pressure on resistance at 1.25, followed by 1.2682

1.2484 and 1.2369 are the next support levels GBP/USD Drifting Ahead of US Inflation_1

Source: MarketPulse

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Economic

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Energy

The Stoxx 600 and the S&P500 traded at a fresh ytd high on Monday as the British FTSE 100 lagged behind its Western peers, as mining stocks drove the index lower. But overall, the week started on an optimistic note ahead of today's U.S. inflation update, tomorrow's FOMC decision and Thursday's European Central Bank (ECB) and Bank of England (BoE) decisions. The U.S. 2-year yield advanced to 4.77% and the 10-year yield tested the 4.30% resistance, but both are down this morning, as bond investors lie in ambush before the U.S. inflation update that will hit the headlines in a couple of hours from now.

All eyes on U.S. CPI

Headline CPI in the U.S. is expected to have steadied on a monthly basis thanks to subdued energy prices and the yearly figure may have eased from 3.2% to 3.1% in November. Core inflation is seen steady at 4%. These numbers certainly look much better than what they did back in 2022, when we saw the U.S. core inflation reach 6.6%. But at 4%, core inflation in the U.S. is still twice the Federal Reserve's (Fed) 2% policy target. And as the Fed Chair Powell will certainly say tomorrow, there is an encouraging progress in the Fed's fight against inflation, but the job is not done just yet.

But because the whole monetary policy tightening is here to fight inflation, a softer-than-expected set of inflation figures could further boost the Fed doves and appetite in U.S. bonds, but gains will likely remain limited before tomorrow's Fed decision and economic forecasts. Although the Fed is happy with the current results – weakening inflation despite a healthy loosening in the job market and quite a resilient growth – Powell won't cry victory on inflation and pop the champagne this week. If he did, the sovereign bond party would get out of control. The latter would send yields collapsing and loosen the financial conditions before time and interfere with the Fed's plans to bring inflation down to 2%. Therefore, the chances are that the Fed will sound happy but cautious, no matter what we see in inflation print today.

Activity in Fed funds futures assesses 80% chance for a May rate cut and nearly 50% chance for a March rate cut. This week's inflation data and Fed comments will shift these expectations toward one way or the other, but Powell will sure find it harder to control market optimism if headline inflation eased below the 3% psychological target, into the 2% waters… as yes, at 2 and something percent, we get really closer to the 2% target.

Calm down, says BoJ

The U.S. dollar sees resistance near the top of its November-to-now downtrending channel, the EUR/USD waits around its 100-DMA to find a fresh direction, as the USD/JPY trades around the 145 level, having priced out a good number of expectations of an imminent rate hike next week, as the Bank of Japan (BoJ) officials already killed the idea that a rate hike will happen this month. But the BoJ will hike sooner rather than later, and that makes a short USD/JPY a good trade, for those who are patient enough. From now on, any price recoveries in the USD/JPY will be interesting opportunities to strengthen short USD/JPY positions for top sellers. Note that a stronger yen and a tighter monetary policy is not positive for stock valuations, therefore we could see the Japanese Nikkei 225 index drift lower as the hawkish BoJ expectations strengthen into next year.

In the energy space, U.S. crude is gently recovering toward the $72pb level on threats that OPEC would extend and deepen cuts in case the selloff continued, but on the other hand, the industry news doesn't help bring the bulls in. Freshly announced, Occidental agreed to buy CrownRock for about $10bn to extend its presence in the Permian Bassin. Consolidation in the Permian Bassin means synergy, scale economies and eventually lower production costs. The deal – which is set to close early 2024 – will help drive shale prices to levels not seen since the pandemic crushed oil markets, according to Bloomberg news. Just saying.

To stay updated on all economic events of today, please check out our Economic calendar

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Central Bank

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Swiss economy slows

The Swiss economy hit a road bump lately. Economic growth almost came to a standstill in the third quarter, printing just 0.3% from a year earlier as the manufacturing sector continued to struggle.

Similarly, inflation slowed sharply in November. The annual inflation rate fell to just 1.4%, some distance below the Swiss National Bank's target of "less than 2%". Hence, one could argue the SNB is the first major central to have won the war against inflation. Swiss Franc Shines, Turns to SNB Decision for Fuel_1

Swiss Franc Shines, Turns to SNB Decision for Fuel_1

Against this backdrop, markets are pricing in a 25% probability of an immediate rate cut when the SNB meets on Thursday. For next year, traders anticipate almost three rate cuts in total, which is much less than what the Fed and the European Central Bank are expected to deliver.

Is a rate cut realistic?

Admittedly, it seems highly unlikely that the SNB will cut rates so soon. The latest commentary from SNB Chairman Jordan in mid-November included a warning that rates can still be raised further, so it would be a dramatic reversal to abandon that stance and cut rates immediately.

It would make more sense for the SNB to keep rates steady, but drop its tightening bias and shift to a neutral stance instead, putting the emphasis on incoming data to guide its future decisions. That was also the playbook adopted by the European Central Bank, which is usually the SNB's role model in terms of strategy.

The question is, would such a shift be enough to hurt the Swiss franc? Markets are already pricing in rate cuts in 2024, so a neutral shift at this stage would not be much of a surprise for traders.

What does 2024 hold for the franc?

In the big picture, the Swiss franc is the best performing major currency of this year, hitting an eight-year high against the euro and a record high against the Japanese yen lately. The SNB's long-awaited exit from negative interest rates and its FX interventions to prop up the franc this year in order to fight inflation were major factors, alongside the nation's classic current account surplus.

Looking into next year, this stellar performance could continue. Even though the SNB probably won't be so active in the FX market now that inflation has cooled, there might be other positive developments for the franc. For instance, foreign central banks like the Fed and ECB will likely cut rates faster and deeper than the SNB will.

Finally, the franc could also benefit from a slowing global economy, thanks to its safe-haven status. The unfolding economic weakness in Europe and China coupled with the uncertainty surrounding the U.S. presidential election could be a combination that keeps the franc supported, as nervous investors search for shelter.

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Kevin Du

Cryptocurrency

If 2022 was the year that "broke bitcoin", 2023 has been the year of trauma recovery.

Bitcoin has bounced pluckily in the face of depressed crypto prices, low trading volumes and tough economic conditions. It even found a second wind in October following a summer slump.

"We've had a nice recovery, but we're just in the cusp of the new cycle," said Kevin Koh, co-founder and managing partner at investment firm Spartan Group.

Indeed, 2023 has been a surprisingly good year for bitcoin.

The king of cryptocurrencies has leapt 164 per cent since Jan. 1 and is trading above $40,000. It has outpaced traditional assets, including gold which has risen 10 per cent and the S&P 500 which has gained 20 per cent.

Bitcoin also increased its share of the total cryptocurrency market, from 38 per cent to above 50 per cent, according to CoinGecko data. The overall crypto market cap has swelled to $1.7 trillion from $871 billion at the end of 2022, with ether's price jumping 95 per cent.

Much of bitcoin's gains came later in the year as a potential U.S. spot bitcoin exchange-traded fund (ETF) and hopes of easier monetary policy renewed investor energy.

Trading volumes have picked back up too, with the combined spot and derivatives trading volume on centralized exchanges hitting $3.61 trillion in November, up from about $2.9 trillion in January, according to CCData.

Meanwhile, stablecoins - cryptocurrencies whose value is pegged to a real world asset like the dollar - have also grown. Tether, the largest such coin, has seen its market cap soar to an all time high of over $90 billion.

Fall of Titans

After a torrid 2022 saw the downfall of FTX and Sam Bankman-Fried, 2023 has seen more crypto giants come a cropper.

Binance chief Changpeng Zhao, plead guilty to breaking U.S. anti-money laundering laws, most notably, part of a multi-billion-dollar settlement with regulators. The co-founder of Voyager Digital also found himself on the wrong end of American regulatory action, while Celsius founder Alex Mashinsky was arrested in the U.S. in July, pleading not guilty to criminal counts including securities fraud.

And not forgetting SBF - after a whirlwind trial, the former industry poster child was convicted of fraud in November.

On a brighter note, Ripple's XRP token clocked gains of 82 per cent for the year after a key legal victory for the industry when a U.S. judge ruled Ripple Labs' sales of the token on public exchanges did not violate securities law.

Bitcoin in 2024

Most of bitcoin's 55 per cent run in the fourth-quarter has been attributed to bets that a spot bitcoin ETF will be approved in the U.S. and pull in money from retail and institutional investors alike on the ease of gaining exposure to the digital asset on a regulated stock exchange.

Asset management giants like BlackRock and Fidelity are among the 13 companies that have submitted applications to the U.S. Securities and Exchange Commission for the multi-billion-dollar product.

Such a fund is expected to pull in as much as $3 billion from investors in the first few days of trading and billions more thereafter.

Not everyone is as bullish though.

J.P.Morgan expects the crypto market recovery to continue through the expected approval in early 2024, however, remains skeptical of the magnitude of success in adoption that broader market is pricing in.

JPM expects the bitcoin ETFs to pull in assets in the low or low to mid-single digit percentage range of the $1.7 trillion crypto market compared with some optimistic outlooks of 10 per cent.

If adoption falls short of investor expectations of around 10 per cent, crypto markets could reverse their recent gains, it said.

To some market watchers, though, it looks like the current bitcoin recovery is still in early stages.

The net dollar-denominated realized profit locked in by bitcoin investors has reached $324 million per day, which remains an order of magnitude below the peaks experienced during the later stages of the 2021 bull market, which eclipsed $3 billion a day, according to analytics platform Glassnode.

This suggests bitcoin's current performance remains very much within the bounds of an early rather than a late-stage bull market, Glassnode said.

Source: Reuters

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Is UK Labor Market Cool Enough for BoE?

EUR/USD, EUR/GBP and GBP/USD Outlook Ahead Major Central Bank Meetings

EUR/USD muted ahead of U.S. inflation data release

EUR/GBP sideways trades above this week's £0.8550 low

GBP/USD range trades ahead of U.S. CPI reading

Dollar Pulls Back as US CPI Data Take Center Stage

GBP/USD Drifting Ahead of US Inflation

Source: MarketPulse

All Eyes on U.S. Inflation

Swiss Franc Shines, Turns to SNB Decision for Fuel

Swiss economy slows

Is a rate cut realistic?

What does 2024 hold for the franc?

Bitcoin Defies Its Doubters in 2023

Source: Reuters

Risk Disclosure

Recent Searches

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Markets

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Data

Is UK Labor Market Cool Enough for BoE?

EUR/USD, EUR/GBP and GBP/USD Outlook Ahead Major Central Bank Meetings

​​​EUR/USD muted ahead of U.S. inflation data release

EUR/GBP sideways trades above this week's £0.8550 low

​GBP/USD range trades ahead of U.S. CPI reading

Dollar Pulls Back as US CPI Data Take Center Stage

GBP/USD Drifting Ahead of US Inflation

Source: MarketPulse

All Eyes on U.S. Inflation

Swiss Franc Shines, Turns to SNB Decision for Fuel

Swiss economy slows

Is a rate cut realistic?

What does 2024 hold for the franc?

Bitcoin Defies Its Doubters in 2023

Source: Reuters

Risk Disclosure

EUR/USD muted ahead of U.S. inflation data release

GBP/USD range trades ahead of U.S. CPI reading