Published: April 13th, 2022
UK unemployment fell to 3.7 per cent in February 2022 from 3.9 per cent in the previous month while wages rose. Those figures will keep hopes alive by forex traders for further Bank of England interest rate hikes, giving Sterling added support in the near-term.
Data from the UK’s Office of National Statistics (ONS) showed average weekly earnings had climbed by 5.3 per cent in February, meeting consensus and increasing above January's 4.7 per cent.
The figures are consistent with Britain’s current pace of economic and persistent wage growth, both sparking inflation concerns that could prompt Threadneedle Street to raise interest rates by another 25 basis points in May.
Forex analysts at CBA says any downside for the Pound ‘will likely be contained this week’ since the UK February employment and March CPI data both make the case for additional policy tightening at the BoE.
The GBP to USD exchange rate stood supported above 1.30 following the data release, however some analysts believe more evidence of sustained jobs growth is needed if GBP/USD is going to hold 1.30-1.33 range support.
A closer look at the ONS figures shows employment rose by 10K in the three months including February 2022, and a notable difference from the -13K contraction in employment seen in January.
Wage and jobs data have to be considered against a backdrop of waning UK economic momentum marked by rising inflation, a factor economists say will bring headwinds to Pound exchange rates over the medium-term.
HSBC’s FX Research unit said in an analyst note that credit growth is rising while business and consumer confidence readings have fallen sharply. ‘That could point to a reduced savings buffer for consumers and affect their spending. If so, it means more downside risks for growth that will be aggravated by higher inflation. Taken together those factors don't paint a bullish picture for the Pound.’
Barclays’ economics unit published a response to the jobs data saying the trajectory of UK economic data will almost certainly prompt Threadneedle Street to raise its rate by another 25 basis points at the May meeting.
'It's still our view that the cycle of BoE rate rises will end there, however we still see potential for another hike by the July, which would be designed to stop expectations for higher inflation becoming entrenched. For the most part, however, we can't see much justification for the pace of rate rises currently expected by the market.’
Exchange rates for Sterling are being priced on expectations of a Bank of England Bank Rate hike of around two per cent before December 2022. If rate expectations diminish it would be consistent with a lower Pound. Anticipation by investors
for more hikes would begin to lower, and pressure on the Pound in forex pairs would increase if future data releases disappoint.
Forex analysts at Commerzbank told Reuters that they see ‘risk of investors having to walk back their rate hike expectations, which would certainly put pressure on the Pound.’
‘Concerns are rising that the UK economy is headed for a recession and the BoE is signaling more hesitancy in monetary policy tightening as a result.’
The ONS figures also point to a rise in the number of job openings in January to March 2022, which economists believe will ensure a robust employment market, even if the rate of growth starts to slow.
‘Demand for labour will probably grow at a slower rate soon,’ the ONS said, ‘due to the increase in employers’ national insurance contributions announced in February. That will squeeze household discretionary spending.’
On the outlook for wages, Barclays says it doesn’t expect pay growth to surge in tandem with rising CPI inflation in 2022.
‘The YoY growth rate of the timelier PAYE measure of median pay only inched up to six per cent in March, from 5 per cent in February. The median pay settlement also held firm at three per cent in March, well below the market expectations and the Bank of England’s own statements on the subject.’
Pressure was rising on the Pound-Euro exchange rate at the start of this week, as markets were buoyed by French President Emmanuel Macron's first round lead in the country’s presidential election.
Joe Hayes, a senior FX analyst at HSBC, told Bloomberg that EUR is ‘taking a breather’ after the incumbent president, Emmanuel Macron, took a decisive lead over his right-wing opponent, Marine Le Pen. ‘That's put a cap on euro-negative political uncertainty, he said.’
But EUR upside could be contained by ongoing worries that Marine Le Pen could pull off an upset in the second round of voting in a fortnight.
A poll by the Ifop institute for French television channel TF1 found Macron was on course to win, but by a small margin, 51 per cent to 49 per cent.
Analysis from Citi finds France's election remains critical, with le Pen mooting a possible French exit from the EU if she wins.
‘We have said in the past that the stakes for this year’s French election should be lower for FX markets than last time round in 2017, when a ‘Frexit’ was on the table. The situation in Ukraine has changed the geopolitical backdrop and Macron could benefit.’
Citi says the conflict and connected European energy crisis have focused attention on the prospect for extended European fiscal easing and even institutional integration, a central tenet of the bank’s bullish Euro stance.
‘We believe a change in the French presidency would cool market expectations for more integration and coordinated action to tackle the energy crisis. It would be every country for itself and that would unwind any overvaluation in peripheral spreads, which would weaken the Euro.'