- Pound recovering against Dollar
- Pound still aiming for 1.19 vs. Euro
- Wages too high to be consistent with 2.0% inflation
- But signs of weakness continue to build as unemployment rises
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The British Pound rode through a mixed set of employment market data that showed rising unemployment but ongoing stickiness in wages.
The Pound-to-Euro exchange rate edged closer to 1.19 after the ONS said average earnings with bonus included rose 5.5% in the year to March, down from 5.7% but still ahead of estimates for 5.2%.
The Pound-to-Dollar exchange rate meanwhile rebounded from Monday's lows to just above 1.32, as markets judge wages are still too high to be consistent with an acceleration in the Bank of England's interest rate cutting cycle.
These data for March come before the hike in minimum wages and associated pay rises pushed through by the government in April, meaning next month's data should tick higher.
The timelier HMRC data, which covers April and hence the increase in the National Living Wage, showed median pay growth surging to 6.4% y/y.
Such signals are entirely consistent with the Bank of England's May decision and guidance that said it would like to maintain a cautious approach to cutting interest rates.
However, there is certainly scope for an acceleration in rate cuts later in the year as the unemployment rate rose to 4.5% in the three months to March, its highest level since 2021.
Although wages are still elevated, companies are having to grapple with the government's increased employment taxes, and the hike in minimum wages will also prove a headwind to employment.
“If last month’s labour market data hinted at an early response to upcoming employer tax rises, this month’s figures confirm a clearer weakening. Unemployment ticked up for the first time in four months by 0.1 percentage point, payrolled employment fell by 33,000, and vacancies dropped further," says Paige Tao, economist at PwC UK.
The Pound might have been higher were it not for these developments, potentially because markets can sense some weakness is in the pipeline.
Nevertheless, the trend in key GBP exchange rates remains higher for now:
- GBP/EUR is trending higher and we think 1.19 is in scope
- GBP/USD is in a medium-term uptrend but a trade accord between the U.S. and China announced on Monday opens the door to a short-term pullback
- GBP/AUD is looking heavy here as the trade accord boosts China proxies, of which the AUD is considered
- GBP/NZD is looking steady in the middle of the range, with domestic issues denying the NZD a chance to rally against GBP
- GBP/CAD remains constructive, with CAD joining the NZD in being unable to really push home any advantages garnered from the China-U.S. deal
Risks Build
Viraj Patel, a strategist at Vanda Research, points out that the single-month UK unemployment rates for February & March have been the highest since the pandemic.
He explains that such single-month rates suggest the official UK unemployment rate is heading to at least 4.6% and risks are skewed towards 5% earlier than the Bank of England currently forecasts
Image courtesy of @VirajPatel
George Buckley, European Economist at Nomura, says the key measures of UK labour market activity and wages were weaker in today’s report, supporting the case for ongoing rate cuts.
However, Nomura don't see enough to suggest the Bank will bring forward its next cut to June, and expects the Bank’s next 25bp move to be in August, taking rates to 4%.
Should the deterioration in the labour market accelerate, and this is matched by below-consensus inflation prints, the prospect of an acceleration in rate cuts in the latter part of the year builds.
This is a key downside risk to the Pound, but for now, this concern is too dim to be tradable.