Finally, Relief for British Pound vs Dollar + Euro as Wages Head Higher, Unemployment Falls

Pound Sterling’s poor run was temporarily arrested by some better-than-forecast labour market data out of the UK on Wednesday, August 16.

The Pound rallied after all key releases from the ONS labour report for August easily beat expectation.

The big surprise was the fall in the UK's unemployment rate to 4.4% after a 125,000 rise in employment in the three months to June which is the lowest rate of unemployment since 1975; markets were expecting the rate to remain stuck at 4.5% for some time.

For Sterling, the good news was however to be found in the wages data - the average earnings index - with bonuses included - rose 2.1% in June. This eclipses the dour 1.8% forecast by economists.

To ram home the point that wages are fast catching inflation, the previous month's reading was upgraded to 1.9%.

Inflation presently stands at 2.4% and that wages increases appear to be keeping in touch with inflation will be good news for the UK economy which relies heavily on domestic demand.

The claimant count fell as 4.2K people came off benefits, markets had expected the number to rise by 3.7K.

The data tells us that the UK might have finally hit the point where falls in unemployment have a notable upward impact on wages.

"The latest labour market figures provided some signs that the tightening in the labour market may be leading to a recovery in wage growth at long last. There was no let-up in the pace of hiring, with employment rising by a healthy 125,000 in the three months to June – above the consensus expectations of a 97,000 rise – and pushing the unemployment rate down to just 4.4%, its lowest since 1975," says Ruth Gregory, UK Economist at Capital Economics.

The Bank of England will be interested in this data as it suggests domestically-generated inflation might be set to rise which could in turn prompt a rise in interest rates in the future.

This is why the British Pound is moving higher in the wake of the data.

Sterling reversed a day or so of weakness following the data.

GBP/USD regained the $1.29 level and GBP/EUR touched above the 1.10 level once more while interest rate expectations 1 to 2 years ahead firmed by 2-3 basis points.

"Our suspicion though is that the Monetary Policy Committee will look through the current period of above target inflation and refrain from raising rates for now. In our view this means no hike in interest rates over this year, and a likelihood that the Bank rate will remain at 0.25% until 2019," says Philip Shaw at Investec in London.

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But, Trends Remain Down

The recovery in Sterling will have to run some way yet before we can say pressures on the UK currency are easing.

The Pound’s decline against the Euro is ongoing with technical analyst Karen Jones at Commerzbank eyeing a move lower in GBP/EUR to 1.0905.

Jones says the Euro will “will stay immediately bid” in the immediate-term while the Pound to Euro exchange rate remains below the 1.1050 downtrend.

Turning to the Pound’s prospects against the US Dollar, yesterday GBP/USD dropped sharply to the six month support line at 1.2859.

“There it should short term stabilise,” says Jones, “we continue to suspect that the 1.3267 current August high was the end of the up move, though.”

“Once the six month support line has given way the 1.2775/59 area will be in focus. It contains the December 2016 high and the April 21 low,” adds Jones.

We will be looking for today's labour market data to potentially snap Sterling out of these entrenched downtrends.

Mixed Bag for Euro

Sterling advanced on the Euro thanks to better-than-forecast UK market data but also thanks to developments concerning the European Central Bank.

The Euro pared gains as some in the market "reset their lofty expectations for the ECB to soon roll back monetary stimulus," notes Joe Manimbo, an analyst with Western Union.

Reports today suggested ECB President Mario Draghi would not use next week’s platform at the Fed’s Jackson Hole symposium to choreograph an imminent reduction in stimulus.

"The secret sauce behind the euro’s outperformance this year has been expectations the ECB would start to unwind stimulus sooner rather than later with the bloc’s economy rebounding at a steady clip," says Manimbo.

In the past Draghi has used the symposium to signal major changes in ECB policy and naturally parallels were being drawn to an expected imminent wind-down in the ECB's stimulus programmes.

While the report is unconfirmed, we would suggest it has fired a shot of caution into the currency market's approach to the single currency.