Pound Sterling Slides Against Euro and Dollar as June BoE Rate Cut 50-50 Call

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May 14, 2024 – Written by David Woodsmith

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The latest UK data continued to suggest that the labour market is weakening, but wages growth remains a concern. The timing of a Bank of England (BoE) rate cut remains a key influence and the data mix suggests that June remains a very close call.

The Pound initially edged higher after the wages data, but then retreated sharply as markets put greater weight on evidence of a weaker labour market.

The Pound to Euro (GBP/EUR) exchange rate initially strengthened to 1.1645 before a sharp retreat to near 1.1610.

MUFG expects GBP/EUR will weaken to 1.1495.

It added; “We are still sticking to our bearish bias for the pound, but acknowledge the recent UK data flow has not been favourable for our view.

The unemployment rate increased to an 8-month high of 4.3% in the three months to March from 4.2% previously, in line with consensus forecasts.

According to preliminary data, payrolls declined 85,000 for April after a revised 5,000 decline for March.

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The economic inactivity rate increased to 22.1% in January to March, from 21.9% at the end of 2023.

Although labour demand appears to be weakening, there will also be concerns over a lack of supply.

This will increase the risk of stubborn wages growth and stagflation.

The principal focus was on wages data given the implications for BoE policy.

Headline average earnings increased 5.7% in the year to March compared with consensus forecasts of 5.4% with the February figure revised higher to 5.7% from 5.6%.

Underlying earnings also held at 6.0% for the year.

Private-sector pay – a key metric for the BoE – eased slightly to a 9-month low of 5.9% from 6.0% while public-sector wages increased 6.3%.

ONS director of economic statistics Liz McKeown, commented; “We continue to see tentative signs that the jobs market is cooling, with both employment from our household survey and the number of workers on payroll showing falls in the latest periods.”

She added; “Earnings growth in cash terms remains high, with the recent falls in the rate now levelling off while.”

Bank of England interpretation of the data will be crucial.

In comments on Tuesday, Chief Economist Pill stated that the focus is on the labour market, pay growth and services prices.

Pill added that; “there is still some work to do on inflation persistence.”

According to Ashley Webb, UK economist at Capital Economics; “While the further easing in regular private sector pay growth in March suggests that wage pressures faded a bit faster than the Bank of England expected, broader measures of wage growth are probably still a bit too strong for the Bank’s liking.”

He added; “At the margin, this may make the Bank a bit more uneasy about first cutting interest rates in June.”

According to Yael Selfin, chief economist at KPMG UK there is evidence of a “gradual deterioration in the labour market”.

Selfin added; “Next month will be key in terms of pay data as it will provide initial evidence of the impact of April’s National Living Wage increase. If it comes in line with our expectations of only a modest boost, and sufficient to keep annual pay growth on a downward trajectory, this could ignite more dovish sentiment on the MPC ahead of their June vote.”

XTB research Director Kathleen Brooks commented; “the rise in the unemployment rate to the top of the medium-term range, is not a cause for concern, but it could support a rate cut from the BOE next month.”

Deutsche Bank chief UK economist Sanjay Raja added; “The UK labour market continues to show signs of cooling – which should spell good news for the MPC. Private sector regular pay growth – while still elevated – came down a little more than the Bank of England was expecting at 5.9%.”

ING took a similar view; “The latest UK wage figures were a touch higher than expected, but this appears to be mainly linked to public sector pay. Private sector wage growth was more in line with what had been expected, and it’s this that the Bank of England is paying closer attention to.”

It added; “Services inflation next week is ultimately what will make or break the June rate cut story (market currently pricing 50% chance).”

MUFG is still backing a later move; “It should further reinforce market expectations that the BoE will wait until the August MPC meeting to begin cutting rates.”

ING commented on EUR/GBP; “Our view remains generally bullish on the pair (GBP/EUR losses), but admit that a substantial move higher may well need to wait a bit longer and potentially only materialise in the summer, when we see markets pricing rate cuts beyond August more aggressively.”

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