During the European session today, all eyes were on the UK jobs report, which came in much better than expected. Yet, despite the positive outcome, the British Pound failed to rally and declined all the way back below 1.2420’s so far. In this article, we will explain the outcome and the reasons behind the GBP’s weakness.
Definition
- Unemployment Rate: Percentage of total work force that is unemployed and had been actively seeking employment during the past 3 months. It is released monthly, about 45 days after the month’s end.
- Average Earnings Index: This index measures the change in the price businesses and the government pay for labor, including bonuses. Data represents the 3-month moving average compared to the same period a year earlier. A figure that excludes bonuses is also released, but not included for lack of significance. Source changed series calculation formula as of Jan 2010.
- Claimant Count Change: Change in the number of people claiming unemployment-related benefits during the previous month. It’s the first indication of the employment situation, released a month earlier than the Unemployment Rate.
Why Is This Important?
- Unemployment Rate: Although it is generally viewed as a lagging indicator, the number of unemployed people is an important signal of overall economic health because consumer spending is highly correlated with labor-market conditions. Unemployment is also a major consideration for those steering the country’s monetary policy.
- Average Earnings Index: It is a leading indicator of consumer inflation – when businesses pay more for labor the higher costs are usually passed on to the consumer.
Outcomes
| Indicator |
Actual |
Forecast |
Prior |
| Average Earnings Index |
2.3% |
2.3% |
2.3% |
| Claimant Count Change |
9.8K |
1.9K |
5.6K |
| Unemployment Rate |
4.8% |
4.9% |
4.9% |
Today’s economic releases were mostly positive. They included the Average Earnings Index, Core Average Earnings (Ex Bonuses) and the Unemployment Rate. However, the Claimant Count Change has increased by the most since 2012, rising by 9.8K last month, despite the fact that estimates pointed to a decline to 1.9K. Some would ask, why are the figures positive despite the Brexit? The simple answer is, Brexit is not active just yet. Therefore, the real impact will show in the long run, but not anytime soon.
Why Did GBP Decline?
There are two factors involved:
- Rising Claimant Count Change
- Rising USD Across The Board
One of the reasons behind the GBP’s decline is the massive increase in Claimant Count Change, which is seen as an early indication ahead of the unemployment rate. Therefore, the latest unemployment rate decline might not last for long and/or might be revised higher in the coming months.
The second factor is the broader rise in the US Dollar across the board. Many are asking why the US Dollar is rising, despite the fact that everyone seems to be pessimistic toward Trump’s upcoming policies. This is true. However, the market is pricing in a 25 bps increase in the Fed Fund rate in December. The Fed Fund futures stands at 94.0% chance for a possible rate hike in December. Therefore, the current USD rally may continue for a while. However, the Fed will not be pleased with the current rally as it will add more weight on growth, exports and inflation. Therefore, raising rates should come in with a dovish tone.
