Pound Sterling Falls Against Euro and Dollar on Signs UK Jobs Market Cooling

March 12, 2024 - Written by James Fuller

STORY LINK Pound Sterling Falls Against Euro and Dollar on Signs UK Jobs Market Cooling

Important data came early in Tuesday’s session as the UK Jobs Report was released ahead of the LSE open. This contributed to a large gap higher in the FTSE which opened around 0.85% higher near the 2024 peak of 7748 while the Pound dropped moderately, allowing EUGBP to make further small gains towards 0.855.

UK Jobs Report

Hot on the heels of a mixed US Jobs report, the UK releases showed some similar cooling. The most important metric, wage growth, fell more than expected 5.7% estimate to 5.6%. Private sector wage growth dropped from 6.2% to 6.0%, and is clearly heading in the right direction, if at a slower pace than the BoE may have hoped.

“Another way of looking at this reveals that the level of private sector pay remained unchanged in January compared to a month earlier...Given that we saw some very chunky month-on-month pay rises through the first and second quarter of last year, we’d expect this annual rate of wage growth in the private sector to slow to the 4-4.5% area by early summer,” noted ING.

4-4.5% is still above average and inflationary, but should progress be made towards these levels, the BoE may be confident enough to start laying the groundwork for cuts late in the summer. Central banks are expected to start cutting before the 2% inflation targets are met as long as the data supports continued disinflation. As Fed Chair Powell said last week in his testimony,

“We’re waiting to become more confident that inflation is moving sustainably at 2%...When we do get that confidence — and we’re not far from it — it’ll be appropriate to begin to dial back the level of restriction.”

The BoE have not been so explicitly dovish, but the same general path is expected of them. ING expect the bank to make their first cut in August, which would lag the Fed and ECB if they fulfil expectations and cut in June.

“Our base case is that the Bank waits until August, at which point it should have enough evidence that both wage growth and services inflation have eased sufficiently to be able to start cutting rates.”

While wage growth is the most important reading in the Jobs Report, the unemployment rate is also notable as it crept slightly higher from 3.8% to 3.9%. This was expected to stay unchanged and is another sign the UK jobs market is cooling slightly. A higher unemployment rate provides some slack in the workforce and means employees can’t keep demanding higher wages.

A 3.9% rate is still very low historically and doesn’t reflect any strain in the economy. If it carries higher near 4.5%, it will be more of a worry and may get the BoE to cut sooner rather than later, but for now it is a necessary part of the disinflation process.

Market Reaction

So far, the market reaction has been logical. The Jobs Report supports a dovish shift from the BoE in the coming months and cuts some time in Q3. This is obviously a weight on the Pound which has slipped lower against all G7 currencies apart from the Yen, and a positive for the FTSE which is outperforming other stock markets significantly.

Bigger picture not much has changed as market expectations were already leaning towards cuts in August. It just means confidence in this view will be slightly higher and the Pound’s recent relative strength could come to an end. On Monday it topped the leaderboard as the best performing G7 currency in the last 30 days, but it has already slipped to fourth position behind the Euro, Yen and Australian Dollar.

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TAGS: Pound Sterling Forecasts