Pound Today: Hot and Cold for UK Jobs Market Will Keep BoE Cautious

October 15, 2024 - Written by Ben Hughes

STORY LINK Pound Today: Hot and Cold for UK Jobs Market Will Keep BoE Cautious

Employment data in the UK was mixed and won’t swing market bias far from where it is already.

Wage growth remains a hurdle to aggressive cuts from the BoE.

CPI on Wednesday could be more important in shaping policy.

Tuesday’s main event came early in the session with the release of the UK employment report. Headlines will focus on the drop in unemployment from 4.1% to 4.0%, which suggests the Bank of England are under no pressure to cut aggressively. However, there were other weaker elements to balance out the good news which will make Wednesday’s CPI release all the more important in shaping rate cut expectations.

In the immediate aftermath of the release, the pound was firm and EURGBP is down slightly with a –0.15% drop to 0.834. GBPUSD is flat and trading just above the big level of 1.30. The reaction was fairly tame as there was no strong theme to swing markets either more dovish or less so. That might have to wait until Wednesday’s inflation release.

Good and Bad for the UK Jobs Market

A drop in unemployment will make the headlines and is a win for the BoE and for the government. However, the unreliability of the data is well known. As ING note,

“We know for instance that the unemployment data is of dubious quality, as the Office for National Statistics readily admits, owing to long-running sampling issues. The more timely and in theory more reliable data taken directly from payroll systems, suggests the jobs market has cooled more noticeably so far this year.”

The cooling is seen in vacancy rates which are now back at pre-Covid levels. For inflation to truly get under control, this was a necessary step as if there are elevated levels of vacancies, firms need to increase wages in an attempt to fill them. Indeed, the BoE may wish for some further cooling as wage growth remains elevated. Private sector wage growth is stuck near 5% at 4.8%. That will mean inflationary pressures could persist and will give the central bank pause for thought on whether to cut at the same pace as the Fed which has declared tightness in the labour market is no longer a source of inflation.

On balance, this report does suggest concerns over a too tight labour market may continue to feature in the BoE’s decision process. However, it won’t stop further cuts completely and the pound’s reaction following the release suggests nothing much has changed.

Euro Could be Set for a Big Move on Thursday

The euro has been steady in recent weeks and remains weak against the likes of the pound, with EURGBP near 0.83 and multi-year lows. This is a direct result of markets fully pricing in another rate cut from the ECB in the upcoming meeting on Thursday. This would be the bank's third cut and take rates to just 3.4%. As a comparison, the rates set by the Fed and BoE are still at 5.0%.

Should the bank deliver a cut, the euro reaction could be muted as it is already priced in. However, should the ECB keep rates on hold, the market would have to swiftly price it out again and this could lead to a large recovery rally. As ING point out, the cut is by far from a done deal despite what the market thinks,

“Such high expectations from the ECB can be risky and markets should be aware that the fight against inflation is not yet over, a battle that remains the prime objective of the ECB. We see plenty of arguments for the ECB to stay on hold at this meeting.”

The potential for volatility is therefore high and failure to cut could propel EURGBP back towards 0.85 resistance.

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TAGS: Pound Sterling Forecasts