UK Jobs Reaction and CPI Preview

The latest UK employment figures were broadly in line with expectations, setting the stage for inflation data to be released tomorrow, which may hint at the timing of potential policy easing by the BOE.

Jobs Data Opens Door for Easing

While the UK headline jobs numbers met forecasts, but average wage growth slowed more than anticipated, according to data published before the market opened. Wages increased 6.5% in the three months to November, below estimates of 6.8% and the prior reading of 7.2% - the weakest in a year. Alongside a report showing UK demand for labour fell to a decade low, Sterling was already on the back foot ahead of the data release.

The immediate reaction in the markets suggested modest support for the BOE moving to easing as soon as May. The FTSE 100 opened lower against this backdrop, with odds of 130bps rate cuts this year virtually unchanged. However, to counter the narrative, the claimant count and ILO unemployment rates remained unchanged at 4% and 4.2%, respectively.

Focus Turns to Inflation Trajectory

The UK is expected to report ongoing disinflation tomorrow, with consumer prices rising 3.8% annually in November versus 3.9% previously. This would place Britain amongst economies such as the US and Eurozone, where headline inflation has started to edge up in recent months. Core inflation is expected to continue falling to 4.8% from 5.1%. While notably above the 2% target, disinflation signals may influence the BOE's policy outlook.

Analyst surveys show economists anticipate a faster return to target than the BOE forecasts, potentially within months rather than a full year. The outsized wage drop versus projections reinforces views that the central bank is too downbeat on the disinflation dynamic, potentially owing to surprise wage growth reductions.

GBPUSD Ended Upside in Wedge Pattern

Cable's drop followed a bearish rising wedge pattern that ended an upside leg at 1.2828. A typical reaction involves short-term declines to the first and second troughs by 1.25 and 1.2612. If the descent continues, increased bearish positioning could see the pair fall as low as 1.2428, where the trend may change for good. Conversely, any nearer-term support holding would suggest an upside to 1.27 and 1.2786, with the latter exposing the peak and raising the prospects of a move towards 1.29.

Source: SpreadEx / GBPUSD

Key Takeaways

While the latest UK employment data was roughly in line with forecasts, slowing average wage growth somewhat supported an earlier BOE cut. Investors will watch tomorrow's inflation figures closely to gauge the timing of the potential easing, with inflation expected to continue declining but remain above the 2% target. Some economists argue it could return to the target sooner than the BOE's forecast as the larger-than-expected fall in wage growth reinforced the view that the BOE may be too pessimistic about the declining inflation trend.