GBP/USD: Trading the UK Average Earnings Index

UK  Average Earnings Index, released each month, is  a leading  indicator of consumer inflation. A reading which is higher than the market forecast is bullish for the  pound.  

Here are all the details, and 5 possible outcomes for GBP/USD.

Published on Wednesday at 9:30 GMT.

Indicator Background

The Average Earnings Index measures wage growth and is closely watched by analysts, and as a key indicator, an unexpected reading can have a significant effect on the movement of GBP/USD.

The indicator has been dropping, and fell to 1.9% in  December, which matched the forecast.  The  markets are expecting the index to edge up to 2.0% in January.

Sentiments and levels

The dollar  has been broadly  lower  in March, and the pound has taken full advantage.  The pair could be ripe for a downward correction due to profit taking.  US fundamentals remain stronger than the UK, and although the Fed is unlikely to raise rates  this week, the bias remains towards tightening. This monetary divergence favors the US dollar.  So, the overall sentiment is  bearish on GBP/USD towards this release.

Technical levels, from top to bottom: 1.4635, 1.4562, 1.4346, 1.4227, 1.4148 and 1.40.

5 Scenarios

1. Within expectations: 1.7% to 2.3%. In this scenario, GBP/USD could show some slight fluctuation, but it is likely to remain within range, without breaking any levels.
2. Above expectations: 2.4% to 2.8%: A stronger reading than predicted could push the pair above one resistance line.
3. Well above expectations: Above 2.8%: An unexpectedly sharp rise could push GBP/USD upwards, with a second line of resistance at risk.
4. Below expectations: 1.2% to 1.6%: A lower than expected reading could pull the pair downwards, with one support level at risk.
5. Well below expectations: Below 1.2%:  In this scenario,  the pair could break below a second  support level.

For more on the pound, see the GBP/USD forecast.