Published: August 17th, 2022
Sterling is being is holding on to recent levels against the Greenback and Euro after the release of new economic figures that show UK wages rose faster than expected in June, while job vacancies remain high in an environment of low-unemployment.
The UK government’s Office of National Statistics (ONS) said average British earnings were on the rise, with an increase of five per cent in June when bonuses were included. That was above the 4.5 per cent market consensus expected, though less than May's 6.1 per cent rise.
Average earnings excluding bonuses rose by 4.6 per cent, above market expectations of 4.5 per cent and bettering the 4.3 per cent growth posted in May.
While earnings are still well below inflation, Britain’s central bankers are expected to keep raising interest rates, since wage settlements are currently elevated relative to longer-term trends.
An analyst note from Capital Economics said that 'with wage growth going well past the rates of three to 3.5 per cent one would expect with a two per cent inflation target, it confirms our view that the Bank of England (BoE) will need to raise interest rates beyond the three per cent most analysts are expecting.
In an interview with Bloomberg, Noel Harvey, Head of FX Strategy at Monex UK, said that ‘what we have is more labour market data that doesn’t show conclusive evidence of cooling wage pressures. That could scupper BoE plans for interest rate moves based on weaker consumption.’
The UK’s unemployment rate held firm at 3.7 per cent in June, as the number of people in employment rose by 160K on the quarter. July estimates for the number of payrolled employees expected a monthly increase, rising by 72K on the revised June figures to a record 29.6 million.
The UK employment rate dropped by 0.1 percentage points for the quarter to 75.3 per cent, suggesting more people returned to the labour market. The ONS also noted a decline in the numbers of adults classed as ‘economically inactive’.
Analysts say the most recent employment figures are solid and consistent with recent trends, so probably won’t move the dial significantly for GBP. It may be strong enough, however, to hold any significant sell-off at bay.
The GBP to EUR exchange rate traded at 1.1849 in the minutes after the release, moving the rate offered by independent currency firms for euro transfers to 1.1621 and 1.1819 for payments.
The GBP to USD exchange rate stayed more or less unchanged, with bank accounts offering rates around 1.1809 and independent providers at 1.2015.
Capital Economics said that the UK’s labour market is still ‘very tight’.
'The big rise in employment in June alongside accelerating wage growth puts pressure on the BoE to lift interest rates by 50 basis points rather than 25 basis points when it holds its next policy meeting in September. Even when you factor in people moving out of self-employment and the recent fall in real wages, these figures indicate a strong rebound of the British labour market’.
Looking to the longer term, unemployment could start rising and wage growth could stall as immigration increases the supply of workers and job vacancies start to fill. It may already be happening. The number of job vacancies fell 19.7K in the quarter to August reaching 1.27M, the first quarterly drop since 2020.
In a market analysis, Pantheon Macroeconomics said it was encouraging to see a rebound in the size of the non-UK national workforce, a trend that could offset ongoing weakness in domestic labour supply.
'One possibility we now have to consider is that Coronavirus has had a much bigger impact than Brexit on declining immigration over the last two years’. The analyst house expects unemployment to start rising again when the supply of labour increases, lifting pressure on wages and freeing the Bank of England to end the cycle of interest rate rises.
‘Demand for labour is stabilising just as the supply of workers is increasing. The combination of rising British wages and stable minimum salary thresholds for UK visas indicates that immigration will continue to come back to pre-Brexit/pre-pandemic levels. We also believe the domestic labour supply will continue to grow, as we've seen in previous periods of declining real wages when households act to preserve their standard of living.
‘Because of this we believe that the unemployment rate will soon start to rise, perhaps to four per cent or higher by the end of 2022.’
Pantheon analysts are also looking for the Bank of England to defy market expectations and implement a 25 basis point rise when it meets again on 15th September.
Doing so could signal the end of the rate rise cycle, potentially pulling the Pound downward as the market rapidly prices in falling expectations for future rate hikes.
Sterling rose against the Euro and Dollar in May following publication of Q1 UK labour market data 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 beyond consensus.
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 continue its cycle of interest rate hikes.