Wage growth slowdown turns Pound weaker

According to the wage data published by the UK Office for National Statistics, the average weekly earnings from March through May has increased 1.8%, compared with last year, and in line with analysts’ estimates. However, it was below the 2.1% wage growth recorded in the previous three month period.

This indicates that the wage growth lags behind the rise in the consumer prices. The poor wage growth squeezes consumer spending and would indirectly weaken the Pound. Echoing a similar tone, Adam Cole, chief currency strategist at RBC Capital Markets, underlined that even though the headline inflation has picked up, the earnings growth has failed to follow.

Notably, earlier this week, RBC Capital Markets has given a sell recommendation for the GBP/USD pair.

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In the US, last Friday, the Fed insisted on the need for gradual rate hikes to avoid over heating of the economy. In its semi-annual monetary report, which would be delivered by Janet Yellen to Congress, the Fed has stated that a gradual pace of rate hike would assist the labor market to strengthen, while allowing the inflation to rise to the target level of 2%. The central bank has also given a hint of reducing its balance sheet from the current level of $4.5 trillion.

Answering to a query, San Francisco Federal Reserve Bank President John Williams stated that he expects one more rate hike this year, despite the recent softness in the US inflation. Thus, on the basis of the Fed’s optimism in the US economy and increasing the odds of another rate hike this year, we can expect a rally in the US dollar soon.

Technically, the pair is facing resistance at 1.2910. The RSI indicator has crossed below the reading of 50, which virtually bifurcates the bullish and bearish zone. Thus, we can expect the value of the Pound to deteriorate further against the Greenback. The next major support exists at 1.2710.

A short position in the GBP/USD would enable us to gain from the current downtrend. We wish to place a stop loss order above 1.2920, while going short at 1.2880 levels. We intend to wind the short position near 1.2710.

Similarly, we are considering buying a put option valid until July 21st to generate returns of up to 70% on our investment. A strike price of 1.2880 is preferred for the trade.

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