Market Report - 14/05/2024
UK unemployment rises
This morning saw the release of key UK labour market data and with this in mind, and with a busy macro-economic week ahead, I thought a brief update may be useful.
The Office for National Statistics have announced this morning that the UK unemployment rate has risen as companies cut back on hiring and more people drop out of the labour market. The latest UK labour market statistics show that the jobless rate has risen to 4.3% in the first quarter of this year, up from 4.2% a month ago and 3.8% in the previous quarter. That’s the highest unemployment rate in nearly a year, since March-May 2023.
The number of workers who lost their jobs during the quarter amounted to 166,000, bringing the total to 1.486 million. The employment rate fell by 178,000, which is another indication that the labour market is now cooling. The UK's economic inactivity rate increased from 21.9% in the last three months of 2023 to 22.1% in January to March, which is another concerning indicator. This key statistic emphasises a growing number of people quitting their jobs, possibly due to illness or childcare obligations.
Slightly underwhelming labour market data has seen the Pound struggle to find its feet during the early morning trading session on Tuesday, with potential upside being slightly limited. GBP/EUR has remained stable (just under 1.1620), with the German CPI print (2.4% actual vs 2.4% forecast) not adding much volatility to the EURO either. GBP/USD is currently down 0.05% from the open at 1.2550, with market makers keeping a keen eye on Producer Price Index data later today for fresh impetus and suggested fluctuations.
Economists and the money markets have suggested there is an even chance that the Bank of England starts cutting interest rates in June. Currently there is a 50.2% chance of a cut next month (LSEG data), and a 49.8% chance that the BoE leaves interest rates on hold.
According to James Smith, developed markets economist at ING, he says the cooling UK jobs market bolsters the chances of near-term rate-cut. He agrees that “it’s looking pretty 50-50 right now” between June and August for the first rate cut. Should this come to fruition, it could be expected that we see a near-term sell-off of the pound, as this dovish sentiment is digested within the markets. Despite Bloomberg forecasts suggesting GBP is under valued against the EUR & USD, any increase in rate-cut expectations could see GBP bulls lose some traction within the FX markets.
Lastly, taking a look at the US Dollar, it is widely expected that the bout of weakness seen from the dollar across the last two months is a temporary matter. The pull-back we have seen on the USD has mainly been due to rising market sentiment that policy rates at the Federal Reserve will be cut this year. However, following last week’s hawkish speeches from a handful of FOMC members, this may not be the case. In fact, the speeches and tone suggested that a cutting cycle may not take place until 2025. This could help the USD regain some ground. As a result, Swiss Bank Julius Baer is now forecasting that EUR/USD could trade as low 1.04 in the next 3 months, citing a possible ECB rate-cut and overwhelming dollar strength as the reason.