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UK Jobs Numbers: How Low Can Cable Go?

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The GBPUSD has largely been trading flat (within its ups and downs) so far this year. It’s down compared to Jan 2 as it is coming out of its latest downswing. But the data and monetary policy might be conspiring to prevent the price of cable going higher, and in fact, it might turn around and go lower substantially.

Part of that comes from something that BOE Governor Andrew Bailey has said twice in as many weeks: That rate hikes could fall faster than the market anticipates. This is a somewhat unusual situation for monetary policy. Usually it’s the markets that are calling for more action, and the central bank trying to dial back investor speculation. But, then, the BOE is in a somewhat unique situation as well.

Trust the Presses, Not the Prediction

Central banks lost some of their forecasting credibility over the last couple of years, after prediction that inflation would be transitory. Then came the rate hikes that the market forecasted by the banks did not. Then there was the talking up of tightening while markets predicted the end of rate hikes. All of this has led to markets seeming more willing to wait for the data than to go on what the central bank will say.

The BOE’s slow pace of hiking in the face of the highest inflation rates in the developed world left many investors scratching their heads. With inflation still high by any standard, analysts are a little wary about promises that the BOE will be cutting. And this might be contributing to the BOE stepping up its rhetoric to get what it wants.

Why the UK Jobs Numbers Are Key

The main issue driver of higher CPI growth in the UK than in its peers was the unusually tight labor market, which kept average wages rising at a faster rate than inflation. But, since the island nation slipped into a technical recession last year (following multi-decade highs in interest rates), it seems the jobs market is finally starting to ease.

The issue for the BOE is that it might be worried it has overcorrected, raising rates too high to get inflation in order, but also dragging the economy down in the process. That means inflation might keep falling below target, even if it is still too high right now. If the BOE was too little too late to stop inflation from rising, they clearly are not interested in repeating the process when inflation is falling.

Getting the Numbers in Order

As the unemployment rate hovers near the structural level, if it keeps rising too much it could start to be a different (and worse) problem for the BOE. Which means that softening unemployment figures could be a bigger predictor for easing than the slowly falling CPI.

The consensus among analysts is that the unemployment rate will remain unchanged at 4.2%. The claimant count is expected to ease a bit to 6.0K compared to 10.9K prior. We should remember that the higher this number, the worse sign it is for the UK jobs market, as it’s the count of people who have lost jobs in the last month. Average hourly earnings are expected to continue their slow descent to 5.5% from 5.6% prior.

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