GBP/USD: Thumping Labour election victory? Meh, wake me up for payrolls

• Labour has secured a thumping victory in the UK general election
• But the result was predicted and priced by markets months ago
• The June US payrolls report will be important market event on Friday
• GBP/USD sits just below a major resistance zone

Labour has secured a thumping victory in the UK general election, as predicted by polls beforehand. GBP/USD is unmoved on the news, reflecting the result was priced in months ago. But the lack of volatility is also explained by cable’s position on the charts. It sits at an important level, making today’s June US nonfarm payrolls report a potential catalyst for a sizeable market move.

Labour romps in, as predicted

I'm not an election analysts so will keep the detail brief.

According to exit polls from Ipsos, which are historically extremely accurate due to the UK’s first past the post voting system, Labour secured a huge majority in the House of Commons with 410 members, more than three-times the predicted 131 number for the incumbent Conservatives. Other than Labour, the other big winners on the night were the Liberal Democrats with 61 members predicted, benefitting from a massive splintering of the conservative vote to the Reform Party which is tipped to have 13 members.

But the result was predicted and priced in months ago. Labour has a clear and commanding mandate. What it chooses to do with it will be the largest influence on UK markets over the medium to longer-term.

Source: Ipsos

US payrolls the focus for GBP/USD traders

Of more pressing importance for GBP/USD traders is Friday’s US jobs report. While payrolls is always important for markets, this one is especially so given that for the first time since late 2023 it’s only the jobs market  standing in the way of rate cuts from the Fed, not the jobs market and inflation.

As I wrote yesterday, it feels like we’re only one bad unemployment figure away from the Fed unleashing the doves and signaling rate cuts. Markets expect unemployment to hold at 4%, with any upside surprise likely to see markets move quickly to price in the first move by September, with the risk of an earlier move.

Average hourly earnings are also important given the downstream implications for services inflation. It’s tipped to print at 0.3% in June, down from 0.4% in May, seeing the annual pace slow to a multi-year low of 3.9%.

Payrolls are expected to increase by 190,000. Over the past year, the US dollar moved in the same direction as the miss or beat on expectations on 11 of 12 occasions. It’s also topped expectations in eight months over that period only to be revised down on 75% of occasions. Flakey data, but still deemed important.

Markets obvious favour the payrolls figure when it comes to directional signal for FX, but I want to stress it’s unlikely to be the primary focus for the Fed when it comes to the rates outlook. That’s the unemployment rate.

A downside surprise for payrolls and earnings with an upside surprise for unemployment would be the most powerful bearish scenario for the buck, and vice versus when it comes to a bullish scenario.

GBP/USD testing major resistance zone

Given the importance of payrolls, you could not wish for a better position on the charts for GBP/USD to build trades around, sitting just below two key resistance levels that have thwarted bullish breaks on multiple occasions.

1.2800 has been like poison to GBP/USD with only two closes above it over the first half of the year. And those moves didn’t last long. The price action underlines its importance. If cable were to get a foothold above the level, it may encourage bulls to initiate or add to positions, especially if the March high of 1.2894 were to give way. Right now, price momentum is with the bulls.

But should the payrolls report impress unexpectedly again, one look at the chart suggests traders will need little encouragement to go short with protection above 1.2800 looking for a retracement of the recent bullish move.

On the downside, minor support is found at 1.2740 with the 50-day moving average and 1.2613 after that. A break of the latter would open the door to a test of 1.2450. On the topside, 1.2800, 1.2860 and 1.2894 are the initial levels to watch. If the latter breaks, 1.3000 and 1.3140 come into play.

-- Written by David Scutt

Follow David on Twitter @scutty