Pound Sterling strengthens on upbeat UK Employment, UK-US inflation eyed

• The Pound Sterling outperforms the US Dollar as upbeat UK Employment data weighs on BoE sequential interest-rate cut bets.
• UK’s Unemployment Rate unexpectedly falls to 4.2%, Average Earnings outperform expectations.
• Investors await the UK/US inflation data for July, which is scheduled for Wednesday.

The Pound Sterling (GBP) delivers a sharp upside move against its major peers in Tuesday’s London session. The British currency strengthens as the United Kingdom (UK) Office for National Statistics (ONS) reported upbeat labor market data for the three months ending in June, which has weighed on market expectations of subsequent interest-rate cuts by the Bank of England (BoE).

The agency reported that the ILO Unemployment Rate unexpectedly declined to 4.2%. Economists expected the jobless rate to have increased to 4.5% from the prior release of 4.4%.

Apart from improving the job market, the slower-than-expected decline in Average Earnings Excluding Bonuses has also dampened expectations of BoE subsequent rate cuts. Average Earnings, a wage growth measure that drives inflation in the service sector, rose at a faster-than-expected pace of 5.4% from the estimates of 4.6% but was slower than the former reading of 5.7%.

On Monday, BoE Monetary Policy Committee (MPC) member Catherine Mann warned that inflation would remain persistent. Mann said, “Goods and services prices were set to rise again, and wage pressures in the economy could take years to dissipate.”

Going forward, more volatility is anticipated in the Pound Sterling as July's UK Consumer Price Index (CPI) data is lined up for release on Wednesday. The CPI report is expected to show that core inflation, which strips off volatile food and energy prices, decelerated to 3.4% from the prior release of 3.5%.

Daily digest market movers: Pound Sterling outperforms its major peers

• The Pound Sterling strengthens against the US Dollar (USD) in Tuesday’s European trading hours. The GBP/USD pair posts a fresh weekly high above 1.2800 as the British currency capitalizes on the upbeat labor market data. Meanwhile, the US Dollar remains sideways, with investors focusing on the United States (US) CPI data for July, which will be published on Wednesday.
• The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, steadies above 103.00. The US CPI report is expected to show that monthly headline and core inflation rose by 0.2%. Annual headline and core CPI are estimated to have decelerated by one-tenth to 2.9% and 3.2%, respectively.
• An expected decline in US price pressures would boost expectations of a big interest rate cut announcement by the Federal Reserve (Fed). Currently, the CME FedWatch tool shows that traders see a 49.5% chance that interest rates will be reduced by 50 basis points (bps) in September, which is significantly down from the 68% recorded a week ago.
• Market speculation about a big Fed rate cut in September has diminished due to easing US recession fears, which were prompted by a consistent increase in the Unemployment Rate and slowing labor demand in July.
• According to an aggregate recession probability model by UBS Global Research, the odds of the US economy entering a recession have dropped to 53% in July from 60% recorded a few months ago. 
• In Tuesday’s session, the US Dollar will be influenced by the US Producer Price Index (PPI) data for July, which will be published at 12:30 GMT. The report is expected to show that headline and core PPI have grown at a slower pace on a monthly and annual basis.

Technical Analysis: Pound Sterling rises to near 1.2800

The Pound Sterling climbs to near 1.2800 after a positive divergence formation on a daily timeframe, in which the pair continues to build higher lows while the momentum oscillator makes lower lows. This generally results in a resumption in the uptrend, but it should be confirmed with more indicators.

The 14-day Relative Strength Index (RSI) recovers after finding a cushion near 40.00, exhibiting signs of buying interest at lower levels.

The pair rebounds to near the 20-day Exponential Moving Average (EMA), which trades around 1.2800. The near-term outlook will become bullish if the GBP/USD delivers a decisive break above the 20-day EMA.

On the upside, the August 2 high at 1.2840 and the round level of 1.2900 will act as major resistances for the Pound Sterling. Alternatively, the recovery move could falter if the pair breaks below the August 8 low at 1.2665. This would expose the June 27 low at 1.2613, followed by the April 29 high at 1.2570.