Pound slumps as UK jobs market cools
The British pound is struggling across the board this morning after labour market data showed that whilst wage growth remained elevated, the UK unemployment rate unexpectedly ticked higher to 3.9% from 3.8%. GBP/USD is back under $1.25 after clawing back 50% of its two-day slump of 1.3% following the Bank of England’s (BoE) hike last Thursday.
Wage growth remains elevated in the UK with average regular pay, which excludes bonus payment in the UK went up 6.7% y/y in the three months to March, but below forecasts of 6.8%. Average regular pay growth for the private sector was 7% and for the public sector was 5.6%, which is the highest for the public sector since October of 2003. This may fuel speculation that the BoE will need to raise interest rate higher to combat inflationary pressures. Investors are pricing in another quarter-point rise to 4.75% next month, with rates of 5% by September seen as a near certainty. However, in a sign that the labour market is cooling, data showed the number of people on employers’ payrolls fell in April for the first time in over two year and vacancies fell by 55,000 from February through to April. Meanwhile, strike action intensified in March, with 556,000 working days lost because of labour disputes. To summarise, the jobs report was mixed and despite persistent wage growth, earnings continuing to lag behind rising prices, whilst vacancies and payroll numbers are falling.
The pound has reacted negatively to the news overall, and with hedge funds turning the most negative on the currency since December 2021, according to data from the Commodity Futures Trading Commission, perhaps the path of least resistance is to the downside in the short-term.
Running out of time
Global equities recorded a mixed start to the week as investors focused on economic data ahead of the scheduled debt-ceiling debate in the US taking place later today. Failure to raise the debt limit could see the US treasury department run out of cash as soon as June 1. While it is unlikely that such a scenario would play out, markets have already started preparing for it with credit default swaps rising to 12-year highs and the 1-month US government bond paying out 5.75%.
Economic data continues to disappoint the consensus. Yesterday, it was the New York Fed’s Empire State Manufacturing Index falling from 10.8 to -31.8. Between 2009 and the 2020, the lowest the gauge fell was -20, which puts the slide in May into perspective. Leading regional Fed indicators have recently signaled a weaker manufacturing sector. It will be interesting to see how lagging economic data like retail sales and industrial production, published later today, have coped with the headwinds in April. The week is filled with Fed speakers as well with 15 policymakers giving speeches or interviews. The data will be the driving force but the Fed’s reaction to unexpected data surprises might spur volatility.
The US dollar index is coming off a strong week which saw it rise by the most since February. The dollar has given up some of the recent gains in yesterday’s session but is starting the day on stronger footing. The currency remains stuck between the debt ceiling debate, Fed speak and economic data. For now, EUR/USD has found a bottom at $1.0850, but a key support level is being tested.
Weak data starts to drag on euro
The euro broke below its 50-day moving average versus the US dollar on Friday for the first time since late March as weak economic data continues to plague the Eurozone. Yesterday, industrial production in the Eurozone experienced a significant decline of 4.1% m/m in March, larger than the market consensus, and back to the lowest reading since October 2021.
The magnitude of the decline for industry was driven by a sharp decrease in the production of capital goods, including buildings and equipment used in the production of goods and services, which saw a notable drop of 15.4%. We now have a culmination of data points suggesting that economic growth in the Eurozone is weakening and that the 1. interest rate and 2. economic growth differentials, that have favoured EUR/USD, are starting to shrink. This does not dictate a fall of EUR/USD, but it certainly limits the short to medium term upside potential. The next area of support/potential downside target could be the 100-day moving average at $1.08. The Eurozone calendar is somewhat sparse for the remainder of the week, except for the ZEW surveys and second print of first quarter GDP figures released later this morning.
Hard economic data from Europe has been surprising much weaker than expected, but signs of weakness in sentiment data could be the straw that broke the camel’s back given the strong positive correlation EUR/USD has had with our soft data proxy. A weak reading of economic expectations from the German ZEW survey today could fuel a deeper short-term slump in the euro.
Dollar firms amid risk-off market conditions
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 15-19
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
