August was a good month for cable, and with the latest UK Jobs Data, there are signs that September could be as strong. Although the pair has moved back a bit since the start of the month, that has been more thanks to dollar strength than weakness in the pound. If the current data trends maintain, sterling could be among the stronger of the major currencies.
That’s because economists are coming around to the idea that the BOE might be the slowest of the prominent central banks when it comes to easing. The ECB is expected to ease three times by the end of the year, and so is the Fed, now that Friday’s NFP showed a stronger labor market than expected. By contrast, the BOE is expected to cut only once, though the market doesn’t agree on the timing.
From Strength to Strength
Earlier in the summer, BOE Governor Andrew Bailey had basically said the market was right in pricing in easing through the rest of the year. Back then, the market was expecting around three rate cuts, one of which has already been delivered. Now, Bailey is cautioning that rates might have to stay higher for longer than the market expects. He agrees that inflation is trending in the right direction, but said that there was a risk of inflation reigniting form “labor shocks.”
In other words, the BOE is worried that the labor market remains too tight, despite recent loosening. That could mean wages reverse course, rising faster than productivity and increasing inflationary pressure. For that reason, there is renewed investor interest in the upcoming UK Jobs Data.
What to Look Out For
The UK will release a barrage of data ahead of the market open on Tuesday, including several key labor statistics. The July UK unemployment rate is expected to remain unchanged at 4.2%, suggesting that loosening in the sector could be slowing. Still, inflationary pressure is expected to continue to ease, as average wages are expected to move down to 4.2% from 4.5%.
August UK claimant count is expected to drop to 21K from 135K in the prior month, but we have to remember that July’s figure was well out of the recent range. A lower number is better for the pound, because it means fewer people are seeking benefits after losing a job. Without a major breakthrough in the labor figures, markets could come closer to the views of economists’ about there being less easing, which could keep buoying the pound.
Plenty of Room to Wait
The UK’s surprisingly resilient economy also gives the BOE more room to keep rates higher. Unlike in the Eurozone, where officials are debating about the prospect of a recession. Or the US, where the Fed is seen coming under pressure to ease before the economic indicators deteriorate further. Although the UK economy is forecast to start slowing down later this year, that hasn’t happened yet. As long as growth remains robust, presumably so would hiring, and this could leave the BOE on a higher path than its peers.
On Wednesday is the release of July monthly GDP for the UK, which is expected to improve to 0.2% from 0.0% in June. This would contribute to the annual growth rate rising to 1.3% from 0.7% prior. Naturally an unexpected miss in this data could mean the forecasted slowdown is starting, and renew pressure on the BOE to ease.