UK jobs and US CPI brings volatile day for EUR/GBP, with UK inflation to define direction

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EUR/GBP has seen a volatile day thanks to the latest UK jobs and US CPI data, setting us up for a key UK inflation reading tomorrow

Source: Bloomberg

 

 

 

 Joshua Mahony | Senior Market Analyst, London | Publication date: Tuesday 14 February 2023 

UK jobs decline tempered by US CPI data

The pound has been on the rise today, coming off the back of a UK jobs report that brought higher employment, lower claims, and a decline in average total wages. Between those three elements, there will be some optimism that the economy is moving in the right direction. However, there is a caveat here, with average earnings excluding bonuses posting an unexpected rise (6.7%) which pushes back against the idea that wages have topped out. The fact that wages continue to surge when stripping out bonuses does provide continued concerns that businesses are going to ultimately raise prices to maintain profitability in the wake of higher input costs. Coming off the back of a recent bout of economic warnings from the IMF and Bank of England that growth will be negative over 2023, todays jobs report does highlight an underlying strength that could allow the Bank of England to maintain their tightening stance in a bid to drive down inflation expectations. With the UK inflation data coming up tomorrow, we should soon have a better idea of where this pair moves going forward.

EUR/GBP looks to provide an interesting market to watch here, with the early post-release sterling strength reversing after the US inflation survey. The question here is whether we are expecting to see the EUR/GBP bears continue their recent dominance, or could the wider bullish trend signal a potential impending reversal? Notably, today has seen price fall back down through trendline and 76.4% Fibonacci support as highlighted on the daily chart. That signals the potential for a bearish continuation after a 10-day period that has been dominated by declines for the pair. The afternoon rebound has heightened the potential for a recovery play here, but the intraday charts will be key in providing whether that is coming to fruition.

Source: ProRealTime

Looking from an intraday perspective, we can see how this latest leg lower conforms with the recent downtrend. Each decline has come in a rapid quick-fire move, while each retracement has been protracted in nature. However, things could shift given the pop we have seen in the wake of the US CPI release. A rise through 0.8848 would bring greater confidence that we are due a bullish reversal for the pair. Until then, the intraday downtrend holds, with the rise seen this afternoon bringing the 76.4% Fibonacci retracement into play at 0.8837. This signals a potential bearish turn. From the bearish perspective, this short-term trend would only translate into a wider reversal signal once we see the 0.8 level broken.

Source: ProRealTime

It is clear that this pair has arguments on both sides, with the coming 24-hours bringing the potential for a move that will set us up going forward. Tomorrows UK inflation report provides that exact spark, with markets expecting to see UK headline CPI fall from 10.5% to 10.3%. Given the fact that eurozone CPI fell from 9.2% to 8.5%, such a decline mybe a little worrying given the lack of any substantial ramp up in disinflation. With that in mind, keep a close eye out for this pair and how these key levels hold or break in response to the UK inflation figure tomorrow.