GBP/USD is one of the most popular currency pairs in the world. It is also one of the oldest. Within the forex circles, the pair is known as Cable. This is because of the deep history between the two currencies. In the 19th century, the exchange rate between the two currencies was exchanged using large cables that ran across the ocean floor. Today, the pound forms about 11.9% of the commonly used Dollar Index.
In the long term, the GBP/USD pair has been on a 10 degrees downtrend as shown below.
The biggest dip on the currency pair happened between 1980 and 1985. In recent years, the pair fell in 2016 when the UK voted to leave the European Union. Since then, the pair has fallen by more than 30% as investors have moved to estimate the future of a lone United Kingdom.
In the meantime, the Bank of England, under Governor Mark Carney has followed the steps of their global counterparts by leaving interest rates at a multiyear low. The new dovish interest rate policy came about following the global financial crisis of 2008/9. They did this to stimulate growth, following months of panic among global financial market participants.
Nonetheless, the United Kingdom’s economy has not shown signs of growth. According to the Office of National Statistics (ONS), more than 32 million people are employed, which is 102K more than those employed in June last year. There are only 1.4 million people out of work, who are actively seeking for new opportunities. At the same time, the unemployment rate is 4.3%, which is the lowest level since 1975.
In addition, the manufacturing and services industries are doing well. In the previously released data, the services and manufacturing PMI were at 55.3 and 56 respectively while the business confidence was improving.
To policy makers, these numbers are very important because they help determine the future of the monetary policies.
Probably, the most important number after employment is inflation. In economics, the role of all central banks is to ensure price stability. Speedy inflation growth are not desirable because they make it difficult for people to make ends meet especially when wages are not growing.
This is a major challenge facing the Bank of England. In a recent report, the inflation rate of the country rose to 3%, which is above the BOEs target of 2%. At the same time, wage growth has remained elusive with wages growing by an annualized rate of less than 2.5%.
Last week, a survey from the private sector employers predicted that wages are set to rise above the inflation rate. According to the survey, employers will likely increase wages by 3.1% compared to a wage growth of 2.8% last year.
Tomorrow, at 0930, the UK will release important employment data. It will release the unemployment rate, which traders expect to remain steady at 4.3%. Average earnings are expected to remain steady at 2.5% while average earnings plus bonus are expected to remain steady at 2.5%. At the same time, the claimant counts are expected to drop to 4.1K, down from 8.6K.
These numbers will give traders a better picture about the future of monetary policy. In the past, the BoE has signaled faster rate increases to contain inflation. A combination of a better jobs market and an equally faster inflation will signal sooner and potentially steep increases.