Writing off sterling should come with some sort of health warning. It’s the turn of the bears to take a bruising this morning, after sellers were looking to push GBP/USD down to another round number and 1.20. But today’s strong set of UK employment data has helped propel the pound higher and we get the all-important inflation figures released early tomorrow.
It’s the middle of the month so that means a UK data dump. First up were today’s jobs numbers which saw unemployment fall to its lowest level in nearly half a century in the first quarter of 2022. The jobless rate stood at 3.7% with fewer people out of work than there were job openings for the first time on record. Hiring demand remains solid and a lack of workers means wage growth is running a little faster than it was before the pandemic.
Amid all the headlines, the scorching labour market may start to cool as the squeeze on household incomes deepens. It is also important to note that the Bank of England recently forecast that the unemployment rate could rise above 5% in the next two years. So, upcoming employment reports will be important as they inform on increasing recession risks to the economy.
We may get even bigger headlines tomorrow with the release of inflation data for April. Consensus sees a huge jump in the headline figure to 9.1% y/y from 7% in March. It is going some when a miss on the headline print could still come in at 9%. The main culprit for the surge is the massive 54% energy price hike by the UK energy regulator (Ofgem). This is a symptom of the energy crisis in Europe due to surging wholesale market prices surpassing the price caps and driving several suppliers to the wall.
Key for markets will be the size of the relative price shock to household’s energy bills. The BoE has already warned of 10% inflation into autumn later this year. This is expected to dampen discretionary household spending and crowd out some pricing power in other part so the economy. Indeed, this could show up in the retail sales numbers that are released on Friday.
Governor Bailey added to the more positive sentiment around the pound by sounding more combative yesterday on fighting inflation. This was in contrast to the recent BoE meeting and the focus on the grim growth outlook. His emphasis at his testimony was clearly more on runaway inflation and the tight labour market. This has helped solidify rate hike hopes for a 2% policy rate by the end of the year. Cable is rallying hard today, and bulls would dearly love to get beyond the month-to-date highs to slow the longer-term downtrend.
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