GBP/USD recovered about half of its early losses in European trading on Tuesday but stayed 0.23% lower near 1.3600. It earlier fell to 1.3551, close to a two-week low, after weaker UK labour data.
The UK Office for National Statistics said the ILO unemployment rate rose to 5.2% in the three months to December, from 5.1% and the highest in five years. Forecasts had pointed to 5.1%, while jobs created were 52K versus 82K previously.
Uk Labour Data Drives Sterling Weakness
The number of people claiming jobless benefits increased by 28.8K in January. Average Earnings Excluding Bonus rose 4.2%, down from 4.6%, and earnings including bonuses also slowed to 4.2% from 4.6%, the lowest pace in almost four years.
The pair had already failed to close above the 20-day simple moving average near 1.3635 on Monday. Attention includes support near 1.3500, the 200-day SMA near 1.3440, and Fibonacci levels at 1.3340.
Markets also looked ahead to UK consumer inflation data due on Wednesday. The moves in sterling followed expectations of a 25bps Bank of England rate cut in March.
Given the fresh UK jobs data from this morning, we see a clear bearish signal for the British Pound. The unemployment rate has hit a five-year high at 5.2%, and wage growth is slowing faster than anticipated. This paints a picture of a cooling UK economy.
Rate Cut Expectations Pressure The Pound
These figures strongly reinforce our view that the Bank of England will cut interest rates in March. In fact, overnight index swaps are now pricing in an 85% probability of a 25-basis-point cut next month, a sharp increase from last week. This growing certainty should act as a significant headwind for the pound.
The situation in the UK contrasts with recent data from the United States, where January retail sales figures came in stronger than expected. This policy divergence, with the BoE poised to ease while the Federal Reserve may wait longer, should continue to strengthen the US dollar relative to the pound. This makes shorting the GBP/USD pair a compelling strategy.
For derivative traders, this is an opportunity to position for further downside in GBP/USD. We would consider buying put options with an expiration date in late March or April, targeting a move below the key 1.3500 support level. This strategy allows us to capitalize on the expected fall while clearly defining our maximum risk.
Looking at the charts, the failure to hold above the 1.3635 moving average is a technically weak sign. We recall that during the initial BoE rate cuts back in 2025, the pound typically sold off in the weeks leading up to the official announcement. A break of the trendline support near 1.3500 would likely accelerate declines towards the 1.3440 area.
