(MENAFN- Daily Forex)
For five consecutive trading sessions, the GBP/USD exchange rate has been under selling pressure. It extended losses to the support level of 1.2882, the lowest in two weeks, retreating from the psychological resistance level of 1.3000 that supports a bullish reversal. Amid this performance, the British pound may find that the bank of England (BoE) keeps interest rates high for longer as the government agrees to a round of wage increases to curb inflation.
The Bank of England could still cut interest rates on August 1, but it is increasingly clear that it will have to be cautious in the months to come as the new government commits to public sector wage increases to curb inflation. Moreover, Rachel Reeves is set to hand millions of public sector workers a higher-than-inflation pay rise and try to blame the Conservatives for any tax increases needed to fund it.
This comes after independent pay review bodies recommended a 5.5% increase for half a million teachers and over 1.3 million NHS staff, far exceeding the 3% budgeted. As is known, the BoE closely monitors wage settlements as they can boost demand in the economy and contribute to higher inflation levels. If it believes wages will remain strong, it may be cautious in its approach to cutting interest rates.
Ashley Webb, a UK economist at Capital Economics, stated that limiting the 5.5% wage increase for NHS staff and teachers would be relatively insignificant for monetary policy. He added, "But if the UK government decides to extend this wage increase to all public sector workers, it is likely to support wage growth and domestic inflation a bit more than we expect. This could mean slower and/or smaller interest rate cuts than we expect."
The Times reports that bonuses are paid to the rest of the six million public sector workers, including doctors, police, members of the armed forces and civil servants, who are similarly paid. But how important is that?
The BoE's May forecasts indicated that total average earnings growth would decline from 5.25% in 2024 to 2.25% in 2025. Even if public sector workers only represent 18% of total employment, 5.5% wage increases seem challenging. With 2025 projections, there is not much deeper downward correction in the private sector.
According to forex trading, Sterling is the best performing major currency for 2024 because it benefits from expectations that interest rates in the UK will remain high compared to those elsewhere, offering international investors superior returns. Furthermore, the flow of money from low- to high-interest-rate regions is strong and is a key driver of foreign exchange value in times of low volatility. However, accepting the wage recommendations across the board would require Reeves to find around £8bn. This should come from existing spending plans, which means cuts elsewhere or through further tax increases that could ultimately constrain the economy's potential.
On the electronic trading platforms, the pound to euro exchange rate (1.1870) retreated from its recent highs as expectations of an interest rate cut on August 1st rose again in the coming days. Concurrently, financial markets show that the chances of such a move are between 50 and 50. Also, the pound to dollar exchange rate (1.2900) retreated from its recent highs amid a recovery in expectations of interest rate cuts. Ultimately,
global investor sentiment and US politics are also an important driver for this pair.
Top Forex Brokers1 Get Started 74% of retail CFD accounts lose money Technical forecasts for the GBP/USD pair today:
Based on the performance on the daily chart attached, the pound to US dollar GBP/USD is moving within a descending channel formation that will strengthen if it moves towards the support levels of 1.2820 and 1.2730 respectively. As we mentioned before, the psychological resistance of 1.3000 will remain the most important for the bulls to control the trend. The currency pair will be affected today by the announcement of the PMI readings for the British and American manufacturing and services sectors, in addition to investor sentiment towards risk appetite or not, and then the future of central bank policies.
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