The UK will be releasing a series of key economic data over the course of this week that could substantially rile up cable as investors count down the weeks to when the BOE might cut rates. Evidently inflation will be the focus for investors, but the jobs figures could be just as determinant for the central bank’s decision. and for gauging the overall health of The UK economy.
The market is in a remarkably different situation than it was just over a month ago. All through March, the pound has lost ground against the greenback. Although there has been a bit of fluctuation recently, the trend has remained pretty solid. And the expectations for the data suggests this trend might continue. Though that opens the possibility that the market can be caught by surprise and the pound might find some footing.
Shifting the Central Bank Outlook
It used to be that the market expected the BOE to be the last of the major central banks to move towards easing, with the Fed being the first. But the data from over the last six weeks or so has radically changed that perception, almost reversing it. The Fed was initially slated to start easing in June, while the BOE wasn’t seen easing until sometime in the third quarter. Those positions are starting to flip.
The market now believes the Fed won’t cut until September at the earliest. Meanwhile, an increasingly large number of economists suggest that the BOE could cut in the “second quarter”. Which effectively means June. It’s not an out-right majority, yet, but that could easily change if UK inflation falls even further.
Getting the Jobs in Line
As inflation continues to fall, the one thing that could derail the chance of a rate cut is the labor market. That’s because the BOE believes that tightness in the labor market has kept wages rising at a faster rate than inflation. This in turn has dragged CPI up, and could keep it from getting back to target. In fact, it’s this labor force tightness that pushed the UK’s inflation to be so high compared to other countries that did not experience consistent real wage growth since the end of the pandemic.
The expectation is that the unemployment rate will continue its loosening to 4.0% from 3.9%, which is getting close to structural level. As the number of jobs and jobseekers balances out, then wage growth would be expected to moderate. This is the view of UK businesses, which expect to slow down pay increases in the coming year. That could help alleviate inflation pressure and make it more likely for the BOE to cut and support The UK economy.
What Look Out For in the Data
UK March headline inflation is expected to come down to 3.1% from 3.4% prior, continuing its surprisingly fast downward pace. The core rate is still higher, but also expected to keep falling at a good clip to 4.3% from 4.5% prior.
Of course both of these figures are above the 2.0% target rate, but it’s widely expected that the BOE will make its first cut before prices normalize. This is because the current rate is seen as highly restrictive and hurting the economy. So, once the BOE believes inflation is convincingly heading in the right direction, they will start easing up.
