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Pound Sterling Resilient vs Euro and Dollar Despite Cooling Labour Market

June 11, 2024 - Written by John Cameron


There was a muted reaction to the mixed UK labour-market data, but markets considered that an August Bank of England (BoE) rate hike was slightly more likely.

The Pound edged lower, but the Pound to Dollar (GBP/USD) exchange rate held above June lows below 1.2700 and traded around 1.2725.

Activity is likely to be relatively limited ahead of major US developments on Wednesday, but GBP/USD is liable to drift lower.

Scotiabank noted key support at 1.2675 and commented; “Loss of support here—which is hard to rule out because of the broader buildup of US bullish momentum—would target losses extending to the 1.2550/00 zone.”

The latest UK labour-market data recorded an increase in the unemployment rate to 4.4% compared with expectations of no change at 4.3% and the highest reading since the third quarter of 2021.

According to the data, the number of people on payrolls declined by a further 3,000 for May after a revised 36,000 fall for April.

Vacancies continued to decline, the 23rd successive fall while the inactivity rate increased to 22.3% from 22.0% the previous quarter.

Headline average earnings increased 5.9% over the year, unchanged from a revised 5.9% the previous month and above consensus forecasts of 5.7%.

Underlying earnings growth held at 6.0% and in line with market expectations.

Wages in the public sector increased 6.4% over the year while private-sector wages increased 5.8%, the lowest reading since the second quarter of 2022.

According to the ONS; “This month’s figures continue to show signs that the labour market may be cooling, with the number of vacancies still falling and unemployment rising, though earnings growth remains relatively strong.”

Yael Selfin, chief economist at KPMG UK, commented; “Wage growth remained elevated in April as the 10% hike in the National Living Wage was enough to temporarily arrest the downward momentum in pay.”

RSM UK economist Thomas Pugh also pointed to the minimum wage impact; “The punchy 0.6% m/m increase in private sector regular pay in April was enough to keep headline total pay growth at 5.9%. However, we estimate at least half of this monthly increase was due to the one-off 9.7% increase in the national minimum wage.”

There was evidence of weaker underlying growth. MUFG commented; “The PAYE median pay measure slowed to an annual rate of 5.2% in May which was the lowest level since October 2021.”

Markets will focus on the implications for interest rates.

According to KPMG’s Selfin; “Overall, today’s data are unlikely to warrant an immediate shift in policy from the Bank of England. We expect the MPC to stay put at its June meeting and reassess the incoming data flow over the summer before it embarks on cutting interest rates.”

RSM’s Pugh added; “It is clear the labour market is loosening and forward-looking indicators suggest pay growth will slow, combined with a further fall in inflation in May, that should be enough to justify the Bank of England following the ECB with a rate cut in August.”

Richard Carter, head of fixed interest research at Quilter Cheviot, was more cautious; “The BoE will be incredibly cautious to cut rates at a period when spending power is high for consumers and potentially triggering a fresh inflationary bout. As such, today’s data will continue to put a dampener on a rate cut in June or August, with November remaining the likeliest date to see that first fall.

Matthew Ryan, head of market strategy at Ebury commented; “Sterling largely held its own off the back of the data, as while rapidly rising wages could delay the start to Bank of England interest rate cuts, the increase in joblessness bodes ill for the UK’s growth outlook.”
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