Published: May 17th, 2023
Sterling gave back recent gains against the Dollar and Euro this week after 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 holding steady at the previous month’s level.
Bank of England (BoE) policymakers have been especially focused on wage data as they look for signals that UK inflation is becoming embedded. While the numbers are robust, Threadneedle Street may conclude that wage increases are close to reaching a peak, especially if unemployment continues to rise.
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 Threadneedle Street to re-think its policy of raising interest rates, employment and wage growth must come down. This would be seen as proof that the economy was cooling, easing domestic inflation pressures.
At the time, Barclays said the situation pointed to another 50 basis-point hike, followed by further increases.
The GBP/EUR rate was under pressure in early 2023 but saw a notable shift to bid after the labour market data print. Investors saw the figures as an indicator that the UK economy was in better shape than believed. GBP/EUR stood at 1.1289 in the hours after publication, having dipped as low as 1.1254 before the release.
In early January, traders were bearish on the Pound, but only insofar as coming US economic data provided inspiration for fresh bids on Greenback exchange rates.
‘A Dollar index move through 103.50 could be sufficient to move GBP/USD back through 1.2100, but it’s our view that the pair will finish the week below 1.2000,’ said Barclays in a January 2023 analyst note.
GBP/USD slid more than ten percent in the latter months of 2022 as gloomy forecasts for Britain’s economy and a reduced pace of Bank of England (BoE) interest rate rises relative to US Federal Reserve kept markets in bearish mode.
‘Westminster’s plans to reduce financial sector regulation post-Brexit could give net capital inflows a boost, though there are a number of potential risks which could weigh on Sterling's ascent in the first half of next year,’ added Barclays.
In mid-May of 2022, Sterling was up against the Euro and Dollar following publication of UK labour market figures that revealed a strong rise in wages and a bigger than expected drop in unemployment.
Numbers from the UK’s Office of National Statistics (ONS) showed that Britain added more than 82,000 jobs in the three months to March, well in excess of what the market was expecting.
The rate of unemployment also made a surprise drop to 3.6 per cent from 3.9 per cent, the lowest level seen in five decades.
'Even with the slowdown in growth seen in March, the UK labour market is simmering with record openings and lateral employment moves,’ said the Confederation of British Industry (CBI) in a press statement.
Average Wages, including bonuses, spiked by seven per cent in March, much more than the 5.5 per cent markets were expecting.
The overall economic print was stronger than expected, sustaining pressure on the Bank of England (BoE) to keep on raising interest rates.
In a labour market where unemployment is low and unfilled vacancies are high, wages tend to rise, which can add to inflation pressures. In the face of this sort of data, BoE policymakers often have little choice but to act, or at least signal intentions in the near term.