Pound Sterling: Markets Digest Unlocking Delay, but Jobs Data Offers a Glimmer of Optimism

- GBP has absorbed bad news on restrictions
- UK unemployment rate reported at 4.7%
- EU-UK trade spat simmers in background

Above: Prime Minister, Boris Johnson. Picture by Andrew Parsons / No 10 Downing Street.

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The British Pound lost value in the wake of a decision by the UK government to delay the ending all Covid-19 restrictions on June 21, although analysts are confident weakness in the currency will be relatively short-lived as the decision was entirely expected and the UK's jobs market shows further signs of recovery.

The ONS reported the number of payrolled employees has increased for the sixth consecutive month, up by 197K in May 2021 to 28.5 million which left the unemployment rate static at 4.7%.

The number of job vacancies in March to May 2021 was 758K, only 27K below the level before the pandemic in January to March 2020; most industries have recovered to show vacancies above pre-pandemic levels.

The Pound was largely softer against its major peers despite the numbers, suggesting little fundamental justification for the weakness.

"GBP remains on the defensive... at the lower end of its range on GBP-USD, and losing ground to the EUR. The softness comes despite a generally hawkish picture painted by this morning’s release of UK labour market data for April," says Daragh Maher, Head of Research, Americas, at HSBC. 

The release of the employment report comes just hours after the UK economy experienced a setback after it was announced on Monday June 14 that the full lifting of all Covid restrictions in England would not take place on June 21 as previously signposted in the government's roadmap owing to a rise in Covid-19 cases.

Prime Minister Boris Johnson said at a news conference he was now looking to July 19 as the next date for such a move, although a review would take place in two weeks from now.

But the decision to delay was signposted by the government via numerous briefings to national media outlets, meaning foreign exchange markets have had time to incorporate the decision into Sterling.

Indeed, the Pound-to-Euro exchange rate (GBP/EUR) trades towards the top of a May-June range at 1.1640 while the Pound-to-Dollar exchange rate (GBP/USD) trades towards the bottom of a tight range located between 1.41 and 1.42.

"Shorter-term downward momentum has improved but GBP has to close below 1.4080 before a move to 1.4050 can be expected," says Leang.

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"The failure of GBP to at least grind higher on the wages data suggests a lot of good news is already in the price, or the FX market is somewhat discouraged by yesterday’s delay in the UK’s return to a full reopening," says Maher.

Johnson - who was flanked by his senior medical advisors - said a delay to further easing was required to allow the NHS to vaccinate more of the population in order to counter the spread of the Delta variant.

Currently, 79.2% of adults in the UK have been vaccinated at least once (61.2% of the total population), and 56.9% are now fully vaccinated (43.9 of the total population).

The UK economy is seeing a strong rate of expansion as the majority of lockdown restrictions have already been lifted and most industries are able to operate and take advantage of backed-up consumer demand.

Key to the economy's performance in June and July will be to what extent the rise in cases of the Delta variant of Covid-19 impacts on consumer confidence.

"The UK economy is recovering though the delay to full re‑opening will delay the recovery for one month," says Joseph Capurso, Head of International Economics and Currency Strategist at Commonwealth Bank of Australia.

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Equally important will be business confidence which is negatively impacted by uncertainty and the spectre of further delays to fully unlocking could dent economic activity and investment which might prevent the Pound from achieving full potential.

"Postponing the grand re-opening due to the Indian variant may weigh on GBP near-term," says Lars Sparresø Merklin, Senior Analyst at Danske Bank.

The announcement means social distancing rules, six-person limits to indoor groups, work from home guidance, face mask wearing and nightclub bans will all remain in place for now.

Johnson said the government's target for offering the first vaccine dose has been brought forward from the end of July to July 19, meaning all adults should have been offered at least one shot of the vaccine at this point.

People aged 23-24 are expected to be called forward for their vaccination today.

Beyond the pandemic, the Pound faces additional headwinds from EU-UK trade tensions centred on Northern Ireland, which are expected to simmer in the background over coming days.

"The ongoing UK‑EU dispute over trade rules for Northern Ireland is a headwind to GBP," says Capurso.

No major breakthrough on the deadlock followed the G7 summit and it will be up to EU and UK politicians to attempt to reach a political settlement over coming days.

UK Brexit Minister David Frost is due to meet his EU opposite Maroš Šefčovič this week and any breakthrough could lift sentiment towards the Pound although political commentators believe this is an unlikely outcome given the entrenched views on the matter.