Pound Stable as UK Unemployment Hits 4.4%, BOE Easing Eyed

Key Takeaway

• UK unemployment rose to 4.4%, the highest since 2021, indicating a cooling labor market and potentially easing BOE concerns.
• Money markets are pricing in 30 basis points of BOE easing by December, with a 50% chance of a rate cut in September.
• The British pound's momentum against the euro may face challenges if UK inflation cools, heightening expectations for BOE rate cuts.

UK Wage Data and Unemployment

The British pound experienced a slight decline following the release of UK wage data and unemployment figures. The annual wage growth, excluding bonuses, remained steady at 6%, aligning with the previous reading but falling short of the anticipated 6.1%. Including bonuses, wage growth was slightly higher than expected at 5.9%, compared to the forecasted 5.7%. Additionally, the previous reading was revised upwards.

Unemployment in the UK unexpectedly rose to 4.4%, marking the highest level since 2021. This increase in unemployment, coupled with falling vacancies, suggests a cooling labor market. David Goodman, a Bloomberg analyst, noted, "The report seems to point to a cooling in the labor market in general. That, plus the lack of a major tick higher in wages growth excluding bonuses, will be a relief to the Bank of England, who may have been concerned about the impact of the large increase in the minimum wage."

Bank of England Policy Outlook

The recent labor market data is not expected to significantly influence the Bank of England's (BOE) upcoming monetary policy decision. The BOE is anticipated to maintain its current stance during the summer, especially with the UK election underway. Policymakers are scheduled to meet on June 20, but all public statements have been suspended until after the July 4 election.

Money markets are currently pricing in approximately 30 basis points of BOE easing by December. There is a 50% chance of a rate cut in September, with a higher likelihood of a reduction in November, according to swaps tied to meeting dates as of Monday’s close. This sentiment is echoed by market participants who are closely monitoring the central bank's actions in response to the evolving economic landscape.

Pound's Performance Against the Euro

The British pound's recent momentum against the euro may face challenges, particularly if average hourly earnings data disappoints. The uncertainty surrounding the French elections has pushed the EUR/GBP lower, but this leaves the pound vulnerable to any signs of cooling UK inflation. Such evidence could heighten expectations of imminent BOE rate cuts.

The Overnight Index Swap (OIS) market indicates a slightly more than 50% chance of a rate cut by September. The recent shift in the BOE outlook has led to speculators increasing their long GBP positions at a faster rate than the euro over the past four weeks, with leveraged funds being the primary drivers. Mary Nicola, a Bloomberg analyst, highlighted, "While political risk in France will continue to dominate the pair, as that abates, central bank dynamics will regain control as the key catalyst for the pair. This may work in the single currency’s favor as rate differentials suggest that the recent move looks overstretched."