GBP flows: GBP softer after labour market data
Earnings data broadly in line with consensus, but employment data showing clearer weakness suggests upside risks for EUR/GBP
GBP is trading slightly softer after the release of the latest set of UK labour market data. We continue to see the HMRC data as being both more reliable and more up to date, although these only cover payrolled employees. These show only a marginal rise in average earnings in the latest month and a fall in the y/y rate of earnings growth to 5.6%, but there was an upward revision to the February data so the y/y rate in March is close to the originally reported February rate. The ONS version of the average earnings data shows a similar growth rate of 5.6% in the 3 months to February (one month behind the HMRC data). The earnings data doesn’t really support a weaker pound, coming in close to consensus. However, the employment data is clearly on the weak side of expectations, both in the HMRC numbers and the ONS data. The HMRC data shows a 67k decline in employment in March, the largest decline since the pandemic, while the ONS data shows a 156k decline in the 3 months to February, and a rise in the unemployment rate to 4.2%.
This is clear evidence of a loosening in the labour market and while it probably won’t be enough to swing the MPC towards a rate cut in May, another number along these lines might be enough to trigger a move in June. The market is currently pricing June as around a 50-50 chance, and the path of UK rate cuts is priced to be more similar to the US than the Eurozone. This looks out of line with the likely economic performance, which remains much more similar to the Eurozone than the US. There is therefore scope for UK yields to fall from here, and GBP to fall with it, although the lack of real weakness in the earnings data suggests that EUR/GBP is unlikely to progress far above 0.8550 at this stage.