The UK's labor market presents a challenging situation with high wage growth and increased unemployment, creating uncertainty for the Bank of England's next steps.
Highlights
Today, the UK Labour Market Overview had a significant impact on market attention, particularly regarding wage growth. A higher rate of wage growth would indicate a more cautious and optimistic policy outlook from the Bank of England (BoE).
Unexpectedly, the UK unemployment rate rose from 4.0% to 4.2% in June. However, average earnings, including bonuses, demonstrated growth of 8.2% year-over-year compared to 7.2% in May. Economists had projected a lower increase of 7.3% for June, with the unemployment rate remaining steady at 4.0%.
The Office for National Statistics (ONS) reported that the rise in regular pay, including bonuses, was mainly driven by one-time National Health Service (NHS) bonus payments. Additionally, the unemployment rate saw an increase of 0.3 percentage points from April to June, primarily influenced by individuals unemployed for up to six months. The UK employment rate for the period of April to June 2023 was 75.7%, indicating a slight decline of 0.1 percentage points compared to January to March 2023.
According to the ONS, there was a significant shift from economic activity into unemployment, resulting in a notable net movement. Vacancies in the UK experienced a decline of 66,000 from May to July 2023, marking the thirteenth consecutive decline. Additionally, claimant counts increased by 29,000 in July, surpassing the 16,200 rises in June. The forecast for July had anticipated a decrease of 7,300.
The substantial increase in average earnings, including bonuses, will likely contribute to speculation of a more cautious approach from the BoE in their monetary policy. However, the rise in the unemployment rate and the underlying reasons behind the growth in average earnings and bonuses might give the BoE cause to wait for the July report before making any decisive moves.
GBP to USD Reaction to UK Wage Growth
Before the release of the UK Labor Market Overview report, the GBP to USD exchange rate initially increased to a high of $1.26943. However, it later dropped to a low of $1.26753.
Following the release of the report, the GBP to USD exchange rate experienced a decline, reaching a low of $1.26798. However, it then rebounded and reached a post-report high of $1.27209.
As of now, the GBP to USD exchange rate stands at $1.27090, reflecting a 0.18% increase from the initial value.
Next up
The upcoming releases of US retail sales and the NY Empire State Manufacturing Index are expected to have an impact on the market. However, the retail sales figures are anticipated to have a more significant effect.
Economists forecast a 0.4% increase in retail sales for July, compared to a 0.2% increase in June.
If retail sales experience a significant jump, it could potentially lead the Federal Reserve (Fed) to consider raising interest rates. This would be in an effort to control spending and mitigate the impact of consumer price inflation caused by high demand. However, it's worth noting that the manufacturing sector accounts for less than 30% of the US economy, so the NY State manufacturing numbers are unlikely to strongly influence the Fed's decision-making process.
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