GBPUSD hit on mixed bag UK data ahead of FOMC minutes

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By :  ,  Financial Analyst

The US dollar is higher across the board as the short-covering rally continues. The Dollar Index is now up for the fourth consecutive day. Barring a surprise sell-off later on today in reaction to the FOMC minutes, the greenback could be on the verge of a more significant comeback. Thanks to a stronger economy, the Fed looks set to tighten its belt more aggressively this year. This should help push bond yields higher and support the dollar, especially against her weaker rivals. While the pound may not be so weak any more, it took a dive towards $1.39 from around $1.40 this morning following the release of mixed-bag UK employment and wages data.

Mixed UK data weighs on pound

As a reminder, average weekly earnings in the UK rose 2.5% in the three months to December compared to the year before. This was in line with expectation and unchanged from the previous month. Earnings excluding bonuses also printed +2.5% but this measure of wages was actually slightly better than +2.4% expected and marked an increase from +2.3% previously.  However, the slightly positive wages data was overshadowed by weakness in the jobs sector. The unemployment rate unexpectedly rose to 4.4% from 4.3% as employment increased by 88,000 versus 165,000 expected in the three months to December. However, a key leading jobs market indicator showed a positive surprise: UK jobless claims unexpectedly fell by 7,200 last month.

So, it wasn’t all doom and gloom. However, this was not enough to support the pound, which was pressured further by ongoing Brexit uncertainty amid reports that Britain is demanding an open-ended transition period before officially leaving the EU. Still, given that today’s data were not too bad and with the Bank of England turning hawkish by the day, the pound’s weakness could be short-lived, especially against currencies where the central bank is still more dovish than the BoE.

FOMC minutes eyed

However, against the US dollar, the GBP could extend its declines in the near-term given the recent dollar strength. Consistent improvement in US data means the Fed looks set to raise rates more aggressively this year. We will get a glimpse of exactly how hawkish the Fed really is later on today, when the FOMC’s last meeting minutes are released. This has the potential to move the dollar sharply in one or the other direction. If the minutes convey hawkish comments then the dollar could easily extend its rally, while anything surprisingly dovish could have the opposite impact. But my worry is that everyone is expecting to see hawkish minutes and this is being reflected in the dollar. So, the minutes may have to be significantly more hawkish than anticipated, otherwise profit-taking could lead to a retracement in the dollar’s rebound.

GBP/USD’s lower lows and lower highs point to potential drop to 1.3650

But if the dollar continues to remain bid post FOMC minutes then the cable might snap, especially as it is struggling to get past its pre-Brexit levels around the 1.40s. With GBP/USD recently forming a couple of lower highs and a lower low around these historic resistance levels, we think that a drop towards 1.3650 – the 2017 high – could be on the cards in the coming days. That being said, we would be quick to drop our short-term technical bearish views in the event the cable goes back above the pivotal 1.40 level again.   

Related tags: FOMC Forex GBP

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