Forex Trading Library

UK Employment: Helping the BOE End Tightening?

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The UK will be releasing a barrage of data next week in the lead up to a pivotal BOE meeting. That makes it difficult to predict exactly what the central bank will do, since several of the data points might move market expectations. The first of those major data points is the release of employment data on Monday.

There is a bit of caution around the jobs numbers, since the ONS is still using an experimental measure to gauge employment that might not be fully compatible with prior trends. Therefore, the market might not have as strong of a reaction if the data comes out way out of line. But it certainly can inform directionality for what the BOE might do.

Time for a Rebound?

Cable has been fading its November gains over the last week or so, mostly as the dollar has gotten its mojo back. Going into the final month of the year, it looks like traders are turning more cautious as safe haven flows are becoming of interest. But the outlook for the pound isn’t helping, either, as some analysts think that it’s time for the BOE to throw in the towel on the inflation fight.

The UK still has one of the highest CPI changes in the world, which could cause the BOE to be the last to join the “hold for a long time” club. The main driver for that inflation in the estimation of many economists is that the UK saw some of the largest wage growth among the major economies as well. BOE Governor Bailey has repeatedly said that rising wages are a problem for getting inflation back under control

Getting the Right Set Up to Hold

Signs that the labor market is starting to loosen would likely reassure the hawks at the BOE that inflation is getting back on track. The BOE has insisted that it expects inflation to fall precipitously, and recently Bailey said that the effects of the recent rate hikes haven’t been fully felt yet. Therefore, it seems that regulators are looking for a tipping point to stop with the rate hikes that are seen hurting the UK economy which is stagnant at best.

A substantial increase in the unemployment rate or the claimant count could be interpreted by the market as a sign that the BOE will deliver on the expectation of no more rate cuts going forward. We have to remember that the claimant count is the number of people seeking unemployment benefits, so the higher it is, the worse a sign it is for the labor market.

What the Market is Expecting

The market has already moved to start pricing in rate cuts next year, on the assumption, in part, that the UK labor market will continue to weaken. So, even if the jobs numbers come in flat, it could still end up giving the pound a little bit of a boost as that would likely contract the existing narrative.

The Claimant Count is seen at 9.0K, which is down from 17.8K in the prior month. But the unemployment rate is expected to tick up to 4.3% from 4.2% prior. The main sign of loosening that’s important for monetary policy is the average earnings, which are seen decelerating to 7.3% from 7.9% prior.

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