Ahead of the European cash open this morning, markets welcomed the latest jobs figures out of the UK.

Unemployment remained steady at 4.2% in the three months to November, as expected, while the claimant count change fell to 11,700 for December, down from 16,000 in November and comfortably south of the median estimate at 18,100. The Office for National Statistics (ONS) also reported that ‘from October to December 2023, the estimated number of vacancies in the UK fell by 49,000 on the quarter to 934,000. Vacancies fell on the quarter for the 18th consecutive period, the longest consecutive run of quarterly falls ever recorded, but still above pre-coronavirus (COVID-19) pandemic levels’.

In terms of wages for November (3m YoY), regular pay, excluding bonuses, was as expected at 6.6%, down from a revised 7.2% print in October, and pay, including bonuses, fell to 6.5%, dipping below the 6.8% consensus and 7.2% prior.

On the whole, the recent data on wages demonstrates that although pay remains high, it is showing signs of easing, However, for traders and investors, the question remains whether this will be sufficient for the Bank of England (BoE). Rate pricing forecasts, according to OIS swaps, show markets are almost fully pricing in a 25bp cut for May’s policy meeting, with just over five rate cuts priced for the year, or 132bps. All in all, the change to rate pricing was negligible following the release; traders/investors are likely seeking further information from tomorrow’s inflation data at 7:00 am GMT.

The immediate aftermath of the release witnessed sterling depreciate against its US counterpart, sending the GBP/USD exchange rate to a session low of $1.2660.

CPI Inflation Data for Canada Ahead

In addition to this morning’s labour data from the UK, Canadian CPI inflation numbers will be released today at 1:30 pm GMT. Headline inflation for the 12 months to December is expected to rise slightly to 3.4% from November’s 3.1% increase (the estimate range is between 3.5% and 3.2%). However, the gain is largely expected due to base effects—a drop in gasoline prices. From November to December, CPI inflation is expected tofall to -0.3% from a 0.1% gain. In addition to this, we’ll receive the CPI BoC core index. November’s release showed a 0.1% gain from October to November and a 2.8% increase in the twelve months to November (estimates are not available for December’s release).

The BoC’s overnight rate is at its highest level in 22 years at 5.0%; the central bank has been on hold for three consecutive meetings. You may recall that the BoC Governor Tiff Macklem spoke at the Canadian Club Toronto in December, noting that further declines in inflation will likely be gradual. Macklem added: ‘When it’s clear that inflation is on a sustained downward track, we can begin discussing lowering our policy interest rate. We don’t need to wait until inflation is all the way back to the 2% target to consider easing policy, but it does need to be clearly headed to 2%’. He also added that growth is expected to remain weak until H2, with unemployment anticipated to increase further.

The CPI will be widely watched for clues for the Bank of Canada’s (BoC) policy outlook. The central bank evidently needs an indication of further cooling inflation before removing the possibility of rate hikes and discussing cuts. According to rate pricing (OIS swaps), the first 25bp rate cut is priced for April’s meeting, with five 25bp cuts for the year, or 136bps.

USD/CAD: Resistance in Play

Ahead of the CPI release today, you will note that price action on the daily timeframe for USD/CAD is testing the mettle of a resistance area between CAD1.3515 and CAD1.3489, a base that boasts strong historical significance. Further to this, the upper Bollinger Band is being tested (set to two standard deviations based on a 20-day SMA).

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