"Strong" Jobs Report Keeps Pound Sterling Bid against Euro and Dollar

• UK delivers another solid jobs report
• Wages increase
• Data supportive of GBP
• But, job vacancies decline
• And labour supply increases as immigration picks up
• Should lead to higher unemployment rate in coming months

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The British Pound is supported near recent levels against the Euro and Dollar following the release of new data from the ONS that showed UK wages faster than expected in June, as job vacancies remain elevated in a low-unemployment environment.

The ONS said UK average earnings. - with bonuses included increased 5.1% - higher than the 4.5% the market was looking for, but below May's 6.2%.

Average earnings - excluding bonuses - rose 4.7% in June, ahead of the 4.5% expected, and up on 4.3% in May.

Although earnings remain well below inflation the Bank of England will likely stay inclined to continue raising interest rates given wage settlements remain elevated relative to longer term trends.

"That is stronger than the 4.5% rate that we and the consensus had assumed. With wage growth running well above the rates of 3.0-3.5% that are consistent with the 2% inflation target, it supports our view that the Bank of England will have to raise interest rates further than most anticipate to 3.00%," says Ruth Gregory, Senior UK Economist at Capital Economics.

"Another labour market report out of the UK that doesn’t show conclusive evidence of slack appearing to cool wage pressures," says Simon Harvey, Head of FX Analysis at Monex Europe."This doesn’t bode well for a BoE that is actively seeking a weaker consumption backdrop."

The unemployment rate stayed at 3.8% in June, as the number of people in employment aged 16 years and over increased on the quarter by 160K.

The estimate of payrolled employees for July 2022 shows a monthly increase, up 73K on the revised June 2022 figures, to a record 29.7 million.

The UK employment rate for people aged 16 to 64 years decreased by 0.1 percentage points on the quarter to 75.5%, this suggests more people returned to the labour market.

Indeed, the ONS noted a decrease in the numbers classed as economically inactive.

The data was solid and consistent with trends of recent months and is therefore not necessarily a game changer for the Pound.

However, it is strong enough to protect against a significant sell-off.

The Pound to Euro exchange rate traded at 1.1850 in the minutes following the release, taking the rate offered on bank accounts for euro transfers to 1.1620 and 1.1820 for payments at independent currency firms.

The Pound to Dollar exchange rate was relatively unchanged on where it started the day at 1.2050, meaning bank accounts were offering rates around 1.1810 and independent providers at 1.2016.

"By any metric the labour market is still very tight. And the robust rise in employment in June together with the acceleration in wage growth will heap pressure on the Bank of England to raise interest rates by 50 basis points rather than 25 basis points at the next policy meeting on 15th September," says Ruth Gregory, Senior UK Economist at Capital Economics.

"Even allowing for the rotation out of self employment and recent fall in real wages this is a very impressive rebound of the UK labour market," says Simon French, Chief Economist at Panmure Gordon.

Looking ahead, the unemployment rate is likely to start rising and wage pressures cooling as the supply of labour to the market increases in line with rising immigration levels and a stalling in job vacancies.

The number of job vacancies fell 19.8K in the quarter to August to 1.27M, the first quarterly fall since 2020.

Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, says it was very encouraging to see the size of the non-UK national workforce rebound in the three months to June, offsetting continued weakness in domestic labour supply.

"Suggests Covid has been a much bigger dampening influence on immigration over the last 2 years than Brexit," says Tombs.

Image courtesy of Pantheon Macroeconomics.

Pantheon Macroeconomics expects the unemployment rate to start rising as the supply of labour increases, easing pressure on wages and prompting the Bank of England to consider an end to its interest rate hiking cycle.

"Labour demand is stabilising just as labour supply is picking up," says Tombs.

"This year’s combination of increasing U.K. wages but stable minimum salary thresholds for U.K. visas suggests that immigration will continue to pick up. Meanwhile, we think domestic labour supply will continue to pick up, as it has done during prior real wage squeezes, as households attempt to preserve their standard of living. Accordingly, we think that the unemployment rate will start to rise soon, rising to about 4.2% by the end of this year," he adds.

Pantheon Macroeconomics looks for the Bank of England to disappoint against market expectations and deliver a 25 basis point hike in September.

Such a surprise could signal the end to the rate hiking cycle is close at hand, potentially weighing on the Pound as the market rapidly reprices lower their expectations for future rate hikes.