Pound Reacts to Midex Jobs, But Will CPI Confirm?

A mixed bag in the UK jobs figures left the impression that the BOE might hike sooner ahead of the release of all-important CPI figures tomorrow.

Wages Slow But Also Rise

The ONS release on the latest jobs figures provided positive and negative signs for the UK economy, disappointing stock markets as the FTSE started the day lower in contrast to the rest of Europe's bourses. The key data point illustrates the issue. Average wage growth slowed its pace to 7.9% from 8.2% in the prior month, which was above the 7.4% expected by economists. But, compared to the inflation rate of 6.7% at the time, real wages grew faster. This poses a conundrum for the BOE, which sees wage pressure as an obstacle to bringing down inflation and thinks pay growth is not slowing down enough. The pound rose slightly in response, suggesting that, on balance, the market believes that the data points to the BOE staying higher for longer, just a day after Morgan Stanley predicted the first rate cuts would be as early as July.

The unemployment rate held steady at 4.2% using the new methodology, but the number of people with jobs increased by 54K, compared to analysts expecting a -185K drop. The claimant count - the number of people seeking unemployment benefits - was also lower than expected at 15.2K compared to the 17.8K consensus among forecasts. In a sign of continuing labour market tightness that could leave the BOE inclined towards tightening, the number of vacancies fell to the lowest level since the middle of 2021.

Inflation Is Not Yet Beat, Or Is It?

With the inflation report released on Wednesday, traders will get another chance to assess the likelihood of more tightening from the BOE or just how long the current "higher for longer" conditions will last. The consensus is for a dramatic drop in the headline inflation rate to 4.9% from 6.7% prior, thanks in large part to the gas price hike from Ofgem last year rolling off.

The focus will probably be on the core rate, which is expected to come down but only to 5.6% from 6.1% prior on an annualised basis. The monthly reading might offer some more optimism as it is expected to slow to 0.2% compared to 0.5% last month. The latest jobs numbers likely left the impression that there was a higher chance of a beat since wage growth remains strong. But a miss could bring in a review of just when the BOE will turn to easing to support the economy through the next year.

Correction Pattern Likely Done

The pound still trades within an upward channel and received rejection at 1.22 following a likely wedge or at least flag pattern. Reclaiming 1.23 may open up 1.2337 and the peak of 1.2430. However, sliding under 1.2230, the wedge's first peak could see prices decelerate to 1.2186, exposing 1.2163 and eventually bringing 1.2036 back into the spotlight.

Source: SpreadEx / GBPUSD

Key Takeaways

UK wage growth slowed but still came in above inflation, so real wages grew faster. Unemployment held steady while job vacancies fell, indicating tightness, suggesting the BOE remains inclined to raise rates. Tomorrow's inflation report is key, with analysts expecting headline inflation to drop significantly but core inflation to fall slightly. The pound reacted positively, suggesting the market expects rate hikes for now. Much depends on tomorrow's inflation data, as a lower inflation print could bring forward rate cut expectations next year.