On Wednesday (August 19) during Asian trading hours, the pound rose slightly against the dollar, currently trading around 1.3540. Since bottoming out below 1.3300 in early August, the pound has rebounded by over 200 points. However, this rally has been almost entirely driven by the dollar – weak US employment, inflation, and retail data have reduced the probability of a September rate hike to 35%, while the pound's own interest rate narrative has remained virtually unchanged over the past three weeks. Tuesday's mixed UK employment data, with wages accelerating but job growth nearly halved, failed to provide new ammunition for the pound bulls. Wednesday's inflation data and the FOMC minutes will determine whether this dollar-driven rebound can be sustained.

The pound's "riding the wave" rally

Since bottoming out below 1.3300 against the dollar in early August, the pound has rebounded by over 200 points, returning above major moving averages, with short-term moving averages crossing above long-term moving averages for the first time since spring – a structural change rather than a simple rebound. However, this rally has been almost entirely driven by domestic factors. Tuesday's labor market data, the first major domestic event in three weeks, only elicited a 35-point fluctuation and a slight decline in the pound. While wage growth accelerated slightly to 3.5%, providing marginal support for hawkish sentiment, the near-half-down employment growth and the unemployment rate remaining stable at 4.9% instead of declining as expected resulted in a mixed picture. Money market pricing indicates a near 72% probability of the Bank of England keeping interest rates unchanged in September, almost unchanged from three weeks ago. The pound's rise is not due to buying – but rather to selling the dollar.

Employment data: Wages are accelerating but employment is plummeting; hawks have only won half the battle.

UK regular wage growth accelerated to 3.5% in the three months to June from 3.4%, slightly higher than the expected 3.4%, providing marginal support for the Monetary Policy Committee's hawkish stance. However, employment growth nearly halved from 147,000 to 83,000, and the unemployment rate remained stable at 4.9%, compared to an expected drop to 4.8%. Job vacancies fell to 707,000 in May-July, the lowest level since the pandemic began, except for 2020. The only bright spot was the 11,000 decrease in unemployment claims in July, far better than the expected increase of 11,200. Overall, this employment report did not provide new upward momentum for the pound. While the wage data was slightly positive, the signals of a cooling job market are equally clear.

Wednesday's Test: The Double Impact of Inflation Data and the FOMC Minutes

On Wednesday at 14:00 Beijing time, the UK's July inflation data will be released—the overall CPI is expected to rise to 2.9% year-on-year from 2.6%, while the core CPI is expected to fall to 2.5% from 2.6%. This combination of an overall increase and a core decrease is the most favorable configuration for the Bank of England to keep interest rates unchanged at its September meeting—energy-driven inflation can be attributed to external factors, while the slowdown in core inflation is a true reflection of domestic demand. Services inflation was 3.6% in June and remains the variable that the committee is truly concerned about. On the same day, at 02:00 Beijing time on Thursday, the FOMC minutes will also be released. These minutes record the meeting at the end of July, earlier than any economic data that changed expectations of a September rate hike—non-farm payrolls contracted, CPI was moderate, and retail sales declined. The minutes record the debates at the time, not the predictions; the market will trade the conditions attached to the debates rather than the vote itself.

Summarize

The pound's rebound of over 200 points against the dollar since early August has been almost entirely driven by dollar weakness – a broad-based weakening of US data has reduced the probability of a September rate hike from over 82% to 31%. Mixed UK employment data, with accelerating wages alongside a sharp drop in employment, failed to provide new ammunition for the pound bulls. Wednesday will see a double test with UK inflation data and the FOMC minutes: a combination of rising overall CPI but declining core CPI will strengthen the Bank of England's case for holding rates steady, while the FOMC minutes could influence the dollar's trajectory by revealing internal divisions within the committee. This week's flurry of UK data releases may determine whether this dollar-driven rebound can become a trend. (GBP/USD daily chart, source: FX678) At 13:56 Beijing time on August 19, GBP/USD was trading at 1.3541/42.