GBP rose against both the US dollar and the euro after the UK ILO unemployment rate unexpectedly fell to 4.2% in the three months to June, after recording 4.4% in the previous period and despite expectations for a 4.5% reading.
The EUR/GBP cross dropped lower while the GBP/USD was up on the upbeat UK employment data which weighed on BoE subsequent interest-rate cut expectations.
UK unemployment rate unexpectedly drops
According to data released by the Office for National Statistics (ONS) on Tuesday, the UK ILO unemployment rate dropped to 4.2% in the three months to June from the previous reading of 4.4% and was better than the expectation of 4.5%. The Claimant Count Change which shows the number of people claiming jobless benefits rose by 135K in July, compared with a revised increase of 32.3K in June, which came in below the market estimate of 14.5K.
UK wage inflation, which is measured by Average Earnings excluding Bonus rose 5.4% 3M YoY in June versus 5.7% in May, while Average Earnings including Bonuses increased by 4.5% in the same period. The slower-than-expected drop in Average Earnings Excluding Bonuses helped to improve the job market and diminished expectations of BoE subsequent rate cuts.
On Monday, BoE Monetary Policy Committee (MPC) member Catherine Mann expressed her concerns that inflation would continue to be persistent. Mann said, “Goods and services prices were set to rise again, and wage pressures in the economy could take years to dissipate.”
Why does employment matter?
Employment and the jobs market are a crucial part of the health of the economy and drive currency valuation. High employment has positive consequences on consumer spending and economic growth and is supportive of a country’s currency. A tight labour market where there is a shortage of workers to fill open positions can affect inflation levels because low labour supply and high demand leads to higher wages which in turn add to higher inflation. Due to the labour market conditions close relation to inflation, employment data is also important for, and is closely watched by central bank policymakers.
Looking ahead
If you are trading the pound against the euro or US dollar, the next set of data to look for will be the German August ZEW survey and US PPI data for July which are both due later on Tuesday as well as the UK/US inflation data for July, which is scheduled for Wednesday. July’s UK Consumer Price Index (CPI) data is expected to create significant volatility for the pound. The CPI report is forecast to show that core inflation, with the exception of volatile food and energy prices, slowed to 3.4% from the previous reading of 3.5%.
Meanwhile, in the US, an expected decline in price pressures would strengthen expectations of a big interest rate cut announcement by the Federal Reserve (Fed). Currently, the CME FedWatch tool shows that traders see a 49.5% probability that interest rates will be cut by 50 basis points (bps) in September, which is lower than the 68% recorded a week ago. Speculation about a big Fed rate cut has diminished after recession fears have eased.
On Tuesday, the US dollar will be influenced by the release of the US Producer Price Index (PPI) data for July, which will be published at 12:30 GMT. The report is anticipated to reveal that headline and core PPI have risen at a slower pace on a monthly and annual basis.