Published: September 11th, 2024
The Pound to Euro exchange rate rose to 1.1846 in early trading this week after the UK’s Office for National Statistics (ONS) reported that Britain added 265,000 jobs in the three months to July. That overshot consensus estimates of 123,000 new jobs, and in fact marked the biggest increase since April 2022. Britain’s unemployment rate also dropped from 4.2 per cent to 4.1 per cent.
Wage growth came in at around consensus at 5.1 per cent, though including bonuses in the calculation reduced the growth to four per cent, slightly lower than economists’ 4.1 per cent prediction.
In a note to investors, currency analysts at ABN AMRO wrote that the latest positive employment figures 'have helped Sterling add a few pips against both the USD and EUR. When you include recent upbeat PMI surveys and housing sector growth, the UK economy is outperforming expectations on multiple fronts.’
The GBP/USD rate saw a lift to 1.3081 on Tuesday, though it was under pressure at time of writing thanks to the wider USD rally underway since September began.
This recent set of ONS wage and employment figures strengthens perceptions of a robust UK economy. ABN AMRO said, and supports trader expectations that the Bank of England will avoid altering interest rates when policymakers meet next week.
‘Employment in Britain has risen for three consecutive months, with a three-month rolling average that’s sharply up from 157,000 jobs lost in April to 127,000 jobs gained in July. That will give the hawks at Threadneedle Street the evidence they need to oppose faster rate cuts.
Consensus is looking for the next BoE rate cut to arrive in either October or November, as policymakers will be minded to act slowly for now, given elevated wage levels will likely push inflation up in the coming months.
In May 2023, a downbeat wage and jobs print reversed what had been a period of gains for Sterling, eliminating recent gains against the Dollar and Euro.
According to the ONS, average UK earnings rose by 6.6 per cent in the three months to March 2023, 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.
BoE policymakers had been especially focused on wage data as they looked for signals that UK inflation was becoming embedded. While the numbers were robust, Threadneedle Street eventually concluded that wage increases were close to reaching a peak.
Alongside the wage rise, Britain’s unemployment rate increased to 3.8 per cent in March 2023. Consensus had expected unemployment to remain unchanged at the previous month’s 3.7 per cent.
The data signaled that the hot UK labor market was starting to cool, giving the Bank of England breathing space to look again at concluding the 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 2023, data from the final quarter of 2022 also showed that Britain’s economy generated more jobs than anticipated, alongside faster-than-anticipated wage growth. Forex traders were surprised by the labor 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 labor 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.
Earlier in 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.
