42-Year Low Unemployment and Falling Real Wages Leave Pound Flat
A mixed bag of UK labour market data led to mixed results for Sterling exchange rates yesterday.
The headline unemployment rate surprised markets, sliding from 4.6% to a new 42-year low of 4.5% in the three months to May.
This was thanks to a better-than-anticipated 175,000 rise in employment, which took total employment to an all-time high of around 32 million. However, a drop in average earnings, from 2.1% to 1.8%, curtailed optimism and prevented Sterling rising for the most part.
The British economy is heavily reliant on consumer spending, meaning that economic growth could well soften over the next year or so if household spending power continues to decrease.
Indeed, a 1.8% increase in earnings in May, when inflation rose to 2.7%, indicates that real wage growth is already on the decline.
GBP/EUR Rebounds From 8-Month Low
The Pound to Euro exchange rate struck a fresh eight-month low yesterday morning before bouncing higher as profit-taking kicked in.
Sterling rallied by around a cent versus the single currency yesterday, in a move that some traders believe could mark the end of the two-and-a-half-month downtrend, which has taken GBP/EUR lower by around eight cents since late April.
Having said that, increasingly hawkish sounds out of the European Central Bank could benefit the Euro over the next few months, while Sterling could come under pressure if the recent rise in Bank of England rate hike bets proves premature.
The ECB is unlikely to loosen policy before the end of the year but the single currency could rally on hawkish rhetoric, while the BoE could derail the Pound if it sends a decisively dovish message during August’s monetary policy committee meeting.
GBP/USD Inches Higher as Yellen Strikes Cautious Tone on Inflaion
‘Cable’ touched a fortnightly low yesterday morning but managed to recover later in the day.
During the afternoon the US Dollar weakened slightly following Federal Reserve Chairwoman Janet Yellen’s testimony to US Congress.
Yellen struck a positive tone on the economy, stating that moderate growth would likely ‘warrant gradual increases’ in interest rates. However, the Fed President was markedly cooler on inflation, positing that price pressures ‘continue to run below’ the 2% target and have ‘declined recently’.
Yellen singled out subdued inflation expectations as a particular ‘uncertainty’ that could affect monetary policy and this led to a slight depreciation in the ‘Greenback’.
Overall, the Pound to US Dollar exchange rate increased by around a third of a cent on the day.
GBP/CAD Hits Lowest Level Since March as BoC Hikes Interest Rates
Sterling slid by over -150 pips to strike a four-month low against the Canadian Dollar yesterday.
The catalyst behind the move was the Bank of Canada’s decision to raise interest rates 25 basis points to 0.75%, while also striking a fairly hawkish tone regarding the future path of borrowing costs.
BoC Governor Stephen Poloz suggested that excess capacity in the Canadian economy would likely be absorbed by the end of the year, with economic growth likely to remain solid.
Future interest rate hikes, Poloz added, would depend on domestic data meeting expectations.
GBP/AUD Fluctuates in Choppy Trade
The Pound to Australian Dollar exchange rate traded in a choppy fashion yesterday as the mixed bag of UK labour market data failed to give Sterling a lasting lift.
The risk-sensitive ‘Aussie’ Dollar appeared to gain ground following Fed Chairwoman Janet Yellen’s speech, which led to a slight decrease in US policy tightening expectations.
GBP/NZD Slides -50 Pips
Sterling drifted lower by around half a cent versus the New Zealand Dollar yesterday as traders saw little reason to take GBP/NZD back towards the one-month high struck on Tuesday.
Declining real wages in Britain bode ill for economic growth and interest rate expectations, and this appeared to weigh on demand for the Pound.
Data Released
GBP Bank of England Credit Conditions & Bank Liabilities Surveys
USD Fed Chair Yellen Testifies Before Senate Banking Panel