President Bailey's words strengthened the pound. Time for NFP data

The first Friday of the month means that the market will receive data on the situation on the American labor market. This is definitely the most important point on today's macro calendar. Forecasts indicate that we should receive another cooling signal. Yesterday, the dollar weakened and the EUR/USD rate definitely approached the level of 1,09.

Wall Street stock indices had a good session, which was the result of, among others, good results of technology companies (Amazon, Metaplatforms). BoE maintained the rates of change, but the announcement itself and the subsequent press conference by President Bailey strengthened the GBP.

Will the US labor market weaken?

For a long time, the U.S. job market was "overheated." Since the recovery from the coronavirus outbreak, demand for labor has clearly outpaced supply. However, this gap is narrowing significantly. If this trend continues, wage growth should also slow. Just two years ago, hourly wages were growing by almost 6%. Currently, this dynamics is 4,1%. This factor at this point mainly drives consumer inflation.

The principle is quite simple: if the labor market weakens, the Fed will be able to cut rates faster interest rates. But as Powell emphasized, the economy does not have to fall into a deep recession for the Fed to decide to ease monetary conditions. Therefore, worse data should now weaken the dollar. At the moment, it is clear that the Fed's rejection of the March cut only strengthened the American currency for a moment. The exchange rate of the main currency pair returned to growth yesterday and today reached the highest level since January 25, breaking local highs.

The slowdown in the labor market was also highlighted yesterday in the ISM report. Employment data dropped from 47,5 to 47,1 points. However, the main indicator showed another improvement (49,1 points), although it was still below the threshold level of 50 points. The strength of the American economy was also highlighted by the PMI for manufacturing, which rose to 50,7 points. with 47,9 points

The Bank of England needs more evidence

Interest rates were decided yesterday by the Bank of England, which, as expected, left its main interest rate unchanged. The statement after the meeting no longer indicated the need for further increases. While this paved the way for a rate cut, it also dampened expectations that the BoE might do so soon. In fact, the BoE has stressed that it needs more evidence that inflation will return to its 2% inflation target. in the long run.

The institution expressed particular concern about persistently high inflation in services (6,4% in December), constant "tension" on the labor market and high wage growth. Although these indicators have improved recently, this is still not enough to be sure that inflation, especially core inflation, will continue to decline. 6 people voted for maintaining rates, two for more tightening, and one requested a reduction.

As a result, GBP appreciated. "Cable" rate (GBP / USD) has significantly increased, reaching today's value of 1,2760. Thus, the upper limit of the potential "flag" formation was broken, which, at least in theory, heralds the continuation of the dominant upward trend. However, let us remember that a large part of this movement resulted from the weakness of the US dollar.

Source: Łukasz Zembik, OANDA TMS Brokers