GBP moves higher on labour data, EU summit crucial for pound

Summary:

• GBP trades as one of the top performing G10 currencies

• Wage growth in the UK accelerated in August

• Irish border and backstop among main hurdles towards forging Brexit deal

The British pound is trading higher on the day being one of the best performing G10 currencies at press time. GBP was boosted by good labour market data as well as more optimistic voices ahead of the tomorrow’s EU summit where Brexit will be one of the main topics on the agenda.

Both UK wage growth gauges moved higher in August beating economists’ expectations. Source: Macrobond, XTB Research

The UK labour market data was released at 9:30 am BST. Both earnings gauges surprised investors to the upside. Weekly earnings advanced 2.7% YoY in August while markets expected the gauge to remain at previous 2.6% YoY. Weekly earnings excluding bonuses were forecasted to remain at prior 2.9% YoY with actual data showing a pick-up to 3.1% YoY. The biggest increase was seen in the construction sector while wages in finance industry fell the most in comparison with July. It is worth to note that such a pace of wage growth (earnings excluding bonuses) was not seen in the UK since early-2009. However, while this may of course exert inflationary pressures within the economy it is unlikely that we will see any interest rate hike or cut anytime nearby as the Bank of England already announced it may wait until after the Brexit date. Other data included in the report showed unemployment rate remain at 4%, inline with expectations, and 3-month employment change at -5k (expected +15k).

GBPUSD launching the week with a downward price gap (orange circle) resulting from reports saying that Brexit negotiations were put on hold. GBP managed to regain some ground and close the gap as early as yesterday. Today’s data and new developments in Brexit case helped the pair overcome short term resistance zone ranging 1.3175-1.3185. Source: xStation5

The Brexit stalemate continues after negotiators from the EU and the UK failed to find solutions on issues like Irish border over the weekend. Markets thrilled after reports spurred saying that no additional talks will be held ahead of the EU summit that will begin tomorrow. Investors were concerned as the summit was viewed as an opportunity to work out a preliminary agreement that will be enhanced later on and eventually signed in November. However, some optimism can be seen among European leaders ahead of the summit. Namely, the French President Emmanuel Macron, who was one of the toughest EU leaders in the Brexit negotiators, said that he believes that “collective intelligence” will succeed and that talks that were halted on Sunday will be resumed. The UK Prime Minister Theresa May said that the shape of the agreement is clear in most cases with few hurdles remaining on the way. The two key hurdles that are seen as a major obstacles towards the deal are the Irish border and the so-called back stop. The first issues concerns the hard border on the isle of Ireland. Both parties disagree to bringing it up but a solution must be worked on how to deal with it once Northern Ireland and the Republic of Ireland will be become subjects to different customs regimes. One proposal to avoid Brexit crashing out because of this issue was to leave Northern Ireland under the EU customs union but PM May opposed this idea saying it would break to constitutional unity of the United Kingdom. The other proposal was to leave the whole United Kingdom under the EU customs rules for some time until proper agreement is worked out. However, this idea was opposed by the UK Brexit hardliners that insisted on providing a specific date when such backstop would end so the UK will not be left in the EU customs union indefinitely. As this two issues are major hurdles towards forging the deal investors should focus on news concerning the topics as they are likely to have the biggest impact on the GBP.

After few months of heavy selling the GBPUSD bottom in early-September and started to move higher later on. The pair is sensitive to Brexit developments so traders should pay attention to those when trading GBP tied FX pairs. The resistance zone ranging 1.3260-1.3300 may be the first stop for bulls. In case the pair falls subject to downward pressure the 23.6% Fibo level at 1.3170 may serve as the first support level. Source: xStation5