Pound hits 15-month high after jobs report
Traders are bracing for more interest rate hikes by the Bank of England (BoE) after the UK jobs report this morning showed wage growth numbers keep beating expectations. Both total pay and pay excluding bonuses came in above the consensus forecasts. GBP/USD is changing hands around $1.29 for the first time since April last year.
Average total pay for UK employees rose by 6.9% in March to May 2023 compared with the same period the previous year, whilst regular pay rose 7.3%, equalling the highest readings on record. However, when adjusted for inflation, total pay fell by 1.2% and regular pay dropped by 0.8%. In addition, there were slight hints of labour market loosening as job vacancies continued to fall and the unemployment rate rose to 4%. Nevertheless, nominal wage growth remains uncomfortably high for the BoE and its fight against inflation. Tightness in the labour market is one of the main drivers of inflation in the UK, with the headline figure currently higher than any other G7 nation at 8.7%. Continued upside surprises in wage growth and inflation reinforces our view that the BoE will have to hike another 50 basis points at its August meeting and tighten further in September. But strong wage growth also raises the chances that market pricing of another 125 basis points of hikes this year could be close to the mark.
The high-yielding pound is now 6.6% stronger year-to-date against the softening US dollar, with all eyes on whether $1.30 can be reclaimed. GBP/EUR is toying with the €1.17 handle, with upside restricted by the uplift seen in EUR/USD over the past 24 hours too.
Euro scales two-month peaks
EUR/USD is on track for its fourth daily rise in a row, currently amounting to 1.8%. Key drivers of the currency pair, such as interest rate differentials and energy prices, haven’t really moved though, so speculation is growing that equity rotation, away from US stocks and into better valuations in Europe, could be aiding the common currency.
A report from the Financial Times this morning unveiled that hedge funds have slashed their bets on a rising US stock market to the lowest level in at least a decade and are turning their attention to under-valued European equities over concern about the resilience of the US tech-led rally. As interest rates rise, value stocks should outperform growth stocks, which is usually better for Europe and this rotation away from the US and into Europe, may be one reason why we’re seeing the EUR/USD breach $1.10. The upside potential towards $1.11 could be limited though given, for the first time in eight months, markets don’t expect policy rates in Europe to rise more than in the US in the next 12 months, plus, the EZ-US Citi surprise index differential is at its third lowest since 2003.
On that note, the main economic release from Europe today is Germany’s ZEW sentiment survey, in which both the current conditions and expectations components are forecast to decline in line with the general gloom in the Eurozone. However, the euro’s resilience to dismal economic data of late can be seen in its recent decoupling from sentiment data.
Hope at the end of the tunnel
The first day of the week started with no scheduled economic data releases for the US, putting the spotlight on Federal Reserve (Fed) officials trying to convince markets of their commitment to continue fighting inflation. And while some central bankers did emphasis the need for additional rate hikes to come, it seems that the Fed does recognise that the end of the tightening cycle is getting closer.
Markets still see the expected July hike as the last one to come with the probability of another November hike sitting at 31%. This has put some downward pressure on the Greenback, which is on track to fall for the fourth consecutive day. In addition to some dovish Fed comments, European investors cheered prospects of fiscal stimulus from Beijing and the expectations of a weaker US CPI print tomorrow. Today’s risk on rally is therefore based on a lot of baked in positive expectations, setting us up for two volatile days. Economists expect US consumer inflation to have fallen from 4% in May to 3.1% in May. Underlying inflationary pressures, displayed by the core rate, are expected to have eased from 5.3% to 5%.
This would be a positive development for the Fed’s fight against elevated price growth and would exert a further drag on the dollar. The trade-weighted US-Dollar-Index (DXY) has already fallen by 11% from its 20-year high reached in September 2022. However, with an absolute gain of 14%, the dollar is still positioned comfortably above its pre-pandemic level. A continued fall of US inflation and rates peaking in July or September remain important for the weaker dollar thesis to play out over the second half of the year.
GBP/USD up 1.5% in a week
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Calendar: July 10-14
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*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.
