Pound Sterling rebounds after upbeat UK employment, strong wage growth data

• The Pound Sterling recovers sharply against its major peers after upbeat UK employment data for the three months ending December.
• The UK economy added 107K workers and the jobless rate remained steady at 4.4%, lower than estimates of 4.5%.
• Investors await the UK CPI data and the FOMC minutes on Wednesday.

The Pound Sterling (GBP) bounces back against its major peers on Tuesday after the release of upbeat United Kingdom (UK) labor market data for the three months ending December. The Office for National Statistics (ONS) reported that the economy added 107K workers, significantly higher than the 35K seen in the September-November period.

The ILO Unemployment Rate remained steady at 4.4%, while it was anticipated to have accelerated to 4.5%. Investors were worried about the employment data as business owners had been disappointed with Chancellor of the Exchequer Rachel Reeves's announcement of raising employers' contribution to National Insurance (NI). In the Autumn Budget, Reeves increased employers' social security contributions by 1.2% to 15%, which will come into effect from April.

The employment data also seems to be contradictory to Bank of England (BoE) Governor Andrew Bailey's warning that he sees some softness in the labor market, as he said in an interview with BusinessLive on Monday. In the interview, Bailey also said that the economic outlook sluggish and surprisingly upbeat Q4 Gross Domestic Product (GDP) data had not changed the "bigger picture". In February's monetary policy statement, the BoE halved its growth forecasts for the year to 0.75%.

In addition to strong employment figures, Average Earnings data, a key measure of wage growth, accelerated in the three months ending December. Average Earnings Excluding bonuses accelerated to 5.9%, as expected, from the prior reading of 5.6%. Meanwhile, Average Earnings, Including bonuses, rose by 6%, faster than estimates of 5.9% and the former release of 5.6%.

High wage growth momentum would prompt inflation expectations and force the BoE to hold interest rates at 4.5%.

Going forward, investors will focus on the UK Consumer Price Index (CPI) data for January, which will be released on Wednesday.

Daily digest market movers: Pound Sterling recovers significant intraday losses against US Dollar

• The Pound Sterling recovers most of its intraday losses against the US Dollar (USD) after better-than-expected UK labor market data. Earlier in the day, the GBP/USD pair declined as the US Dollar rebounded.
• The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, rebounds to near 107.00 from the two-month low of 106.50, which it posted on Friday. The Greenback bounces back as investors expect inflationary pressures stemming from United States (US) President Donald Trump's economic agenda will be persistent.
• President Trump has announced 25% tariffs on steel and aluminum imports from all nations and 10% on China. However, Trump's reciprocal tariff plan is delayed and unlikely to come into effect before April. President Trump's nominated Commerce Secretary, Howard Lutnick, said on Thursday that the President will be ready to move on reciprocal tariffs by April 1.
• Meanwhile, firm expectations that the Federal Reserve (Fed) will keep interest rates at their current levels for longer have also offered support to the US Dollar. Fed Governor Michelle Bowman said in her prepared remarks at the American Bankers Association conference on Monday that the benchmark interest rate "is now in a good place", allowing the Committee to be patient and pay closer attention to the inflation data as it evolves. Bowman added that she wants to gain "greater confidence" that progress in lowering inflation will "continue" before supporting monetary policy adjustments.
• Going forward, the Federal Open Market Committee (FOMC) minutes for the January meeting, which will be released on Wednesday, will be a major trigger for the US Dollar. Investors will look for cues about how long the Fed will keep interest rates in the current range of 4.25%-4.50%.

Technical Analysis: Pound Sterling aims to stabilize above 1.2600

The Pound Sterling strives to hold above the key level of 1.2600 against the US Dollar in European trading hours on Tuesday. The near-term outlook of the GBP/USD pair has turned bullish, as it holds above the 50-day Exponential Moving Average (EMA), which stands at around 1.2500.

The 14-day Relative Strength Index (RSI) holds above 60.00. A bullish momentum would activate if the RSI (14) sustains above that level.

Looking down, the February 3 low of 1.2250 will act as a key support zone for the pair. On the upside, the December 6 high of 1.2810 will act as a key resistance zone.