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GBP/USD at a Crossroads
Sterling has been remarkably resilient in the face of weaker data. Yesterday GBP held firm despite lower consumer prices and today, it recovered all of its earlier losses despite significantly weaker than anticipated wage growth. According to our colleague Boris Schlossberg, “UK claimant count declined by a whopping -42K vs, 1,1K eyed but the figure was based on a new measuring method by the ONS and was ignored. Unemployment remained the same at 4.8% but the weak link in the data proved to be wages. Average wages declined to 2.6% from 2.8% eyed with the weakest growth in the private sector which saw the pace decline to 2.8% versus 3.2% the period prior. Clearly, UK consumers are having a difficult time keeping up with cost of living increases and their indebtedness is now highest in Europe. All of this makes it much less likely that the BOE will even consider tightening rates in 2017 as the economic conditions are less robust than they appear.” There are no major U.K. economic reports scheduled for release on Thursday but the slowdown in wage growth points to weaker retail sales on Friday. Between the softness of U.K. data, rise in U.S. rates and the change in Fed fund expectations we expect GBP/USD to retreat soon.
Technically GBP/USD is trapped between the 20-day and 50/100-day SMA cross. It tested the lower bound a number of times and the fundamentals suggest a downside break. However a firm close below 1.2375 is needed for GBP/USD to see 1.22. If it breaks above 1.2550 we could see a stronger move up to 1.2700