GBP/USD eases from weekly highs above 1.3700 ahead of the NFP

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The Pound (GBP) has retraced losses against the US Dollar (USD) on Wednesday, but failed to find acceptance at weekly highs above 1.3700 and has pulled back to the 1.3680 area at the time of writing.

GBP/USD retreats highs at 1.3706, but maintains a moderately bid tone on Wednesday
Soft US data has offset the negative impact from the UK's political crisis.
Investors remain cautious on Wednesday, awaiting the release of US Nonfarm Payrolls data.

The Pound (GBP) has retraced losses against the US Dollar (USD) on Wednesday, but failed to find acceptance at weekly highs above 1.3700 and has pulled back to the 1.3680 area at the time of writing. A weaker USD following Tuesday’s downbeat US economic releases is offsetting the negative impact on the GBP from the UK's political crisis.

Investors, however, remain cautious about placing USD directional bets ahead of the delayed Nonfarm Payrolls report, due later today. Market consensus anticipates a net job growth of 70K in January from 50K in December, with the Unemployment rate steady at 4.4% and wage growth slowing down to a 3.6% yearly growth from 3.8% in December.

The US Dollar fell under pressure on Tuesday as December’s Retail Sales data stalled, with core Sales contracting, suggesting a lower contribution from consumption to Q4 GDP.

Beyond that, the employment costs cooled down more than expected, posting the slowest annual growth since early 2021. These figures suggest a stalled labour market with contained inflationary pressures, and endorse the market’s view that the US Federal Reserve will cut interest rates more than once this year.

Recent US data has offset the negative impact of a political crisis in the UK that has left Prime Minister Keir Starmer fighting for survival. Recent news reports revealing the connections of the former UK ambassador to the US, Peter Mandelson, with the convicted sex offender Jeffrey Epstein, have caused an earthquake in the cabinet, prompting a string of resignations and putting Starmer’s position on the edge.

Employment FAQs

How do employment levels affect currencies?

Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.

Why is wage growth important?

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

How much do central banks care about employment?

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.