Published: August 30th, 2023
The Pound dipped below a benchmark level of technical support against the Greenback and was battling to stay afloat against the Euro on Tuesday after global investors adopted a risk-off approach. The change in sentiment looks to have been triggered by a rally in government bond yields, which deepened the losses for Sterling.
GBP dropped under 1.26 against USD for the first time since early June, posting deeper losses in Asia that carried over to the European trading session on Tuesday as investors looked ahead to remarks from the Federal Reserve.
A market commentary by RBC Capital Markets said that the Dollar had been ‘buoyed’ by rising American interest rates that pushed the DXY (Dollar comparison) Index north of 104.
‘The market for swaps is pricing in a better-than-even chance of a new Fed rate hike announcement during the November FOMC meeting. The probability of this happening has been rising incrementally since this week’s session began.’
Sterling has been supported well between 1.261 and roughly 1.2631 since early June, RBC analysts say, but the level surrendered to risk-off sentiment between Tuesday's close of trading in London and New York.
The losses seen this week added to declines seen the previous week (w/c 21st August) when S&P Global PMI surveys warned that recession-like conditions were rising in Britain’s services and manufacturing sectors.
‘The figures expressed in the most recent business surveys point to a UK economy that’s slowly running out of steam,’ said analysts at Oxford Economics in an interview with Bloomberg. 'As composite PMI's have fallen sharply into contractionary territory, investors need to be concerned about the trajectory.’
In May, GBP gave back recent gains against USD and EUR following publication of UK wage and employment data that indicated Britain’s labour market may have reached an inflexion point.
According to the UK Office of National Statistics (ONS), average UK earnings rose by 6.6 per cent in March, slightly less than the 6.7 per cent figure consensus had expected, but still a shade above April's 6.5 per cent.
With bonuses factored in, the figure was 5.9 per cent, which was anticipated, and held steady at the previous month’s level.
Bank of England (BoE) policymakers have been focused on wage data throughout 2023 as they watched for signals that UK inflation was intensifying. While the numbers were robust, Threadneedle Street has been inclined to underplay the impact of wage increases, believing they would be mitigated in time by rising unemployment.
Alongside the wage rise, Britain’s unemployment rate increased to 3.8 per cent in March. Consensus had expected unemployment to remain unchanged at the previous month’s 3.7 per cent.
The data may signal that the hot UK labour market may finally be starting to cool, potentially giving the Bank of England breathing space to look again at concluding the current interest rate hiking cycle.
The Pound was unsurprisingly softer in the wake of the data release. The Pound to Dollar rate dropped 0.30 per cent in the 30 minutes following the release to 1.2474. The Pound to Euro rate fell 0.20 per cent in the same period, dropping to 1.1479.
In January, data from the final quarter of 2022 showed that Britain’s economy generated more jobs than anticipated, alongside faster-than-anticipated wage growth. Forex traders were surprised by the labour market growth and began to price in another interest rate hike.
Sterling rose after an additional 27K jobs were generated in the three months to 31st December 2022. That projection was unchanged from the previous month, but consensus believed a slowdown to 5K new jobs was in the works.
Unemployment was unaffected, holding firm at 3.6 per cent. People signing on for unemployment benefits rose by 19.6K, less than the 19.7K markets were expecting.
Average earnings including bonuses grew by 6.3 per cent, a rise from October's 6.1 per cent and beating expectations that a 6.2 per cent print would emerge. Take bonuses away and the rate of wage growth rises slightly to 6.4 per cent.
'GBP is trending slightly higher this morning following a mixed UK jobs print,’ said Barclay’s Forex Strategy Unit in a note to investors. ‘Even as vacancies fall, a shortage of qualified workers is forcing firms to raise pay. Wages are going up at the fastest pace since records began, turning the spotlight on the Bank of England, which may need to hike interest rates again.’
That sense of something new happening was echoed by the ONS, which wrote that current wage growth represented 'the largest rate we’ve seen for the private sector.’
For UK central bankers to re-think their interest rate hike cycle, employment and wage growth would need to come down for an extended period. This would provide proof that Blighty’s economy was cooling sufficiently to slow donw inflation.
Earlie this year the GBP/EUR rate was under pressure but swung notably into bid after the Spring labour market data figures were published. Investors saw the print as a signal that economic growth would be better than believed. GBP/EUR rose to 1.1288 immediately after publication, having fallen as low as 1.1253 beforehand.
When the new year began, forex traders had cooled on the Pound, but only until new US data gave them reason for fresh bids on USD exchange rates.
‘A Dollar index move through 103.50 was seen as enough to move GBP/USD back through 1.2100,’ said Barclays in a January 2023 market comment.
GBP/USD dropped more than ten percent in the closing months of 2022 as darkening forecasts for Britain’s economy and a slowing pace of Bank of England (BoE) interest rate rises (relative to the US Fed’s more aggressive schedule) kept markets in risk-off mode.