Sterling Bounces Despite Evidence of Cracks in the UK Labour Market, GBP/USD Again Finds Support Near 1.2450
The Pound to Dollar (GBP/USD) exchange rate resisted further selling on Monday with a move back above the 1.2500 level after finding support on approach to 1.2450.
The Pound to Euro (GBP/EUR) exchange rate also posted net gains to 1.1520.
In comments on Monday, Bank of England (BoE) Chief Economist Pill stated that the bank needed to be wary over the risk of sticky inflation and the risk that inflation settles in a 4-5% range rather than dip further to the 2% target.
The comments reinforced expectations that the BoE would increase rates again in June.
Sterling, however, dipped on Tuesday after weaker than expected labour-market data as a reduction in inactivity increased labour-market supply while the estimated number of employees also decline for the first time in over two years.
GBP/USD dipped to lows below 1.2470 before a recovery to 1.2525 as the dollar slipped again.
GBP/EUR also dipped to 1.1470 before a recovery to 1.1500.
Markets are still pricing in close to a 70% chance of a rate hike at the June policy meeting and overall Pound sentiment has held firm while the FTSE 100 index secured a tentative advance.
In relative terms, UK fundamentals are still seen as attractive with Uk asset prices still relatively cheap.
UK Labour Supply Increases
According to the Office for National Statistics (ONS), the UK unemployment rate edged higher to 3.9% in March from 3.8% previously and compared with expectations of 3.8%.
The number of people on payrolls was also estimated to have decline 136,000 for April and the first decline since February 2021, although the data is subject to significant revision.
The economic inactivity rate declined 0.4% to 21.0% with the decline driven primarily by an increased number of young people returning to work. This was the sharpest decline in inactivity on record.
The number of people inactive due to long-term sickness increased to a fresh record high.
Vacancies were estimated to have declined 55,000 in the three months to April, the 10th successive decline.
Kitty Ussher, chief economist at the IoD, commented; “A combination of high costs and cash-strapped consumers is now causing some businesses to hesitate before hiring, uncertain as to what the future holds. As a result, the number of employees has fallen for the first time in over two years, and the unemployment rate is starting to rise from its post-pandemic low.”
Yael Selfin, chief economist at KPMG UK also sees evidence of a cooler labour market; “Labour market remains resilient, but signs of cooling are beginning to emerge,”
Wages Growth Stabilises
The headline increase in annual wages was held at 5.8% in the three months to March while the underlying increased edged higher to 6.7% from 6.6%, although marginally below expectations of 6.8%.
Average earnings in the public sector grew by 5.6% in the first three months of the year, according to figures from the Office for National Statistics (ONS).
This is the highest level since August to October 2003.
According to the ONS; “Growth in total and regular pay fell in real terms (adjusted for inflation) on the year in January to March 2023, by three per cent for total pay and two per cent for regular pay.”
KPMG’s Selfin added; “Wage growth remains elevated, driven by firms competing for scarce workers and employers seeking to compensate workers for some of the strong inflation and rising mortgage costs they have experienced.”
According to TraderX strategist Michael Brown; "The labour market report is pretty symptomatic of the broader economy. It's stagflationary."
He added; "Earnings growth is starting to run away with itself. Unemployment is rising, payrolled employment is falling. It's not particularly pretty, but I don't think there's anything in there that will deter the Bank from another move in June,"
According to ING the situation was more positive; “Averaging out recent volatility, the change over the past three months relative to the month before was 6.3% annualised, still too elevated, but lower than what we had seen throughout most of 2022. Incidentally, Bank of England surveys suggest that wage growth has peaked.”
ING added; “With the BoE having put a lot of weight on this release, as well as the next CPI print, the chances of a pause at the June meeting have slightly increased.
ING sees scope for a further Euro recovery; “EURGBP has broken back above 0.8700 and we think there is still ample upside room as further BoE tightening is priced out of the Sonia curve.”
US Debt-Ceiling Talks in Focus
After losing some ground on Monday, the dollar posted gains in early Europe on Tuesday, but failed to hold the gains.
There was choppy trading with markets focussing on the US and global economy as well as the pressing issue of the debt-ceiling impasse.
Talks between President Biden and US House majority leader McCarthy are scheduled for Tuesday.
Republicans remain adamant that they will not increase the debt ceiling unless the Administration agrees to spending cuts.
Treasury Secretary Yellen has reiterated that the US will not be able to meet its obligations beyond early June.
According to ING; “Should we see no progress towards a debt-limit deal today, we could definitely see markets price a greater deal of the US defaulting on its debt.
The bank added; The potentially very negative spill-over into risk sentiment and money markets means that the upside risks for the dollar and the yen are quite significant in such a scenario.”
According to Sean Callow, senior FX strategist at Westpac, "U.S. dollar price action has been very messy in recent days, reacting sharply to data."
He added; "There is also arguably some debate over what increased stress over the debt ceiling means for USD. JPY and CHF seem likely beneficiaries, but we have numerous historical examples of global market trauma caused by the U.S. that actually sees the dollar strengthen."