Pound Sterling comes under pressure as UK labor market cools down

• The Pound Sterling faces pressure against its peers due to new data showing the UK labor market is cooling.
• Soft UK labor market data paves the way for more BoE interest-rate cuts.
• Investors await the US inflation on Tuesday as the next catalyst for the GBP/USD pair.

The Pound Sterling (GBP) trades with caution against its peers on Tuesday after the release of the United Kingdom (UK) labor market data for the three months ending March. The Office for National Statistics (ONS) reported that the ILO Unemployment Rate accelerated to 4.5%, as expected, from 4.4% in the three months ending February. In the same period, the economy added 112K fresh workers, significantly lower than the prior release of 206K. 

Slowing UK job growth reflects the impact of the increase in employers’ contribution to social security schemes and caution among business owners in anticipation of tariffs by United States (US) President Donald Trump. The report didn’t capture any effects from the tariff reduction agreement between the US and the UK, as it was announced way after the collection of the data.

Additionally, cooling Average Earnings data is also unfavorable for the British currency. Average Earnings Excluding Bonuses, a key measure of wage growth, grew moderately by 5.6%, against estimates of 5.7% and the prior release of 5.9%. The wage growth measure including bonuses rose by 5.5%, faster than expectations of 5.2% but slower than the former reading of 5.6%.

Cooling employment and softening wage growth pave the way for more interest rate cuts by the Bank of England (BoE). Last week, the BoE slashed its borrowing rates by 25 basis points (bps) to 4.25% and retained a “gradual and careful” monetary expansion approach.

This week, investors brace for more volatility in the Pound Sterling as the preliminary UK Q1 Gross Domestic Product (GDP) and Industrial and Manufacturing Production data will be released on Thursday. The UK economy is expected to have grown by 0.6% in the first quarter of the year. Before that, US CPI data will be published during Tuesday’s session.

Daily digest market movers: Pound Sterling ticks up against US Dollar, outlook remains fragile

• The Pound Sterling edges higher to near 1.3210 against the US Dollar (USD) during European trading hours on Tuesday. The GBP/USD pair ticks up as the US Dollar takes a breather after a strong upside move on Monday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto the previous day’s gains around 101.60.
• The USD Index rallied on Monday after the US and China agreed to a 90-day truce after a two-day meeting in Switzerland over the weekend. In a joint statement, the US and China have announced that they have lowered tariffs by 115 percentage points. Washington reported that import duties on Beijing still have the 20% fentanyl levy, but assured that there have been “constructive discussions” to resolve it. However, Beijing reported in a statement during European trading hours that the fentanyl issue is a matter of the US and not their responsibility. The Chinese Foreign Ministry added that the 20% tariffs imposed on China due to the matter is "unreasonable".
• The strong upside move in the US Dollar and the rally in US equities after the temporary trade truce between the world’s largest powerhouses reflect that the confidence of investors towards the US economy has increased. However, Federal Reserve (Fed) officials have not ruled out the fears of an increase in consumer inflation expectations.
• On Monday, Fed Governor Adriana Kugler stated that tariffs are still steep and will result in an increase in inflationary pressures and an economic slowdown. “[I] still expect an increase in prices and slowdown in the economy, though not at the same rate as before,” Kugler said, downplaying the chances of reducing interest rates. Kugler also said that the 90-day pause on import levies at levels that threatened to shut down bilateral trade reduces chances that the US central bank will need to lower interest rates in response to an economic slowdown, Reuters reported.
• Going forward, the next trigger for the US Dollar will be the US Consumer Price Index (CPI) data for April, which will be published at 12:30 GMT. US headline and core CPI are estimated to have grown steadily by 2.4% and 2.8% on year, respectively. Month-on-month, both figures are expected to have risen by 0.3%.

Technical Analysis: Pound Sterling looks set for more downside on H&S breakdown

The Pound Sterling ticks higher to near 1.3200 against the US Dollar on Tuesday. However, the outlook of the pair has turned bearish after breaking down from a Head and Shoulder (H&S) formation on the four-hour timeframe. A breakdown of the H&S chart pattern leads to a bearish reversal, and its formation near a critical resistance level increases its credibility.

The Cable slides near the 200-period Exponential Moving Average (EMA), which is around 1.3190, suggesting a bearish trend.

The 14-period Relative Strength Index (RSI) rebounds above 40.00 after sliding to near 33.00, indicating that the downside momentum has been defused. However, the bearish bias still prevails.

On the upside, the three-year high of 1.3445 will be a key hurdle for the pair. Looking down, the psychological level of 1.3000 will act as a major support area.