We are bearish of GBP/USD and have been since the top above 1.3100 – while we remain bearish we could see a relief rally to the upside in the short term but that will be a sell in our view – our target on the downside is extended to 1.2000.

UK Wage Growth

“The UK wage numbers are more dovish than the figures suggest: At the headline level, regular pay growth stayed at 7.8% on a 3M/YoY basis - no surprises there. But drill down and if you strip out the public sector, private sector pay barely increased in level terms between June and July. And if we look at the alternative wage data which is based on payroll figures (or PAYE), that actually fell in level terms for the second consecutive month.” (ING)

The headline number looks strong but wage growth will fall 3 charts below:

The headline number looks strong but we can also see job vacancies falling which will relieve the pressure on employers to offer higher wages to attract workers two charts below.

The Economy

U.K. growth has lagged behind the world’s biggest economies since the COVID-19 pandemic and is substantially below the OECD average, according to a report from the influential Paris-based group. (CNBC) We can see that GDP is barely in expansion, PMIs a leading indicator for growth GDP going forward are falling and below 50 which indicates contraction and so to is consumer confidence.

In terms of the consumer there is a cost of living crisis in the UK and the consumer is getting hit hard by interest rates rises. Also in terms of housing market activity is stalling, with new mortgage approvals retreating to around post-financial crisis levels and house prices falling at their fastest pace since then as well. Consumer sentiment is falling and looks set to remain depressed.

Sentiment

Despite the fall in the GBP from recent highs where speculators built up their biggest long since 2014 they still hold an elevated long position – they expect two interest rate hikes form the BoE we expect one and they expect the UK to avoid recession which we think is unlikely...

In terms of the Bank of England, we still have inflation data due a day before the BoE but wage data on its own points to one more hike then a hold but we think also there is a chance of a hold as the BoE will be concerned about the economic downturn and possibility of a recession in the UK. With speculators heavily long we see limited upside in the GBP and plenty of downside.

In Conclusion 

The market expects two more hikes, we think one more is probable but a hold is possible due to the state of the UK economy which in our view will go into recession - we expect more downside and any bounces are likely to fade into or around the 1.2600 level.

Technical Analysis