UK Labor Market Stuns with Strong Figures, Propelling Pound to Multi-Currency Gains

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Summary:

The evolving Bank of England rate outlook, coupled with ongoing economic indicators, will continue to shape the narrative for the Pound in the coming weeks.

The British Pound experienced a substantial surge against major currencies following the release of unexpectedly strong UK labor market data. Contrary to expectations, the unemployment rate remained steady at 4.2%, and job creation outpaced predictions with the addition of 54,000 jobs. The focal point, the UK earnings index, recorded a remarkable 7.9% increase in September, surpassing market expectations. The Pound's rally, attributed to rising UK bond yields, challenges Bank of England rate cut expectations and signals potential inflation concerns. While initial market reactions were positive, underlying trends hint at possible future challenges in wage growth. Eyes are now on the upcoming inflation release and evolving Bank of England rate outlook.

In a surprising turn of events, the British Pound exhibited significant strength against major currencies, fueled by robust labor market data that defied market expectations. The Office for National Statistics (ONS) reported that the UK's unemployment rate remained steady at 4.2% in September, confounding forecasts of a rise to 4.3%. The standout revelation was the creation of 54,000 jobs in the three months to September, defying expectations of a negative reading at -198,000.

UK Labor Market Stuns with Strong Figures, Propelling Pound to Multi-Currency Gains_1

The spotlight was on the UK earnings index, which includes bonuses, revealing an impressive 7.9% increase in September. This figure surpassed the market's anticipated 7.4% rise, and August's increase was revised higher to 8.4%. The Pound's immediate reaction was robust, with the Pound to Euro exchange rate surging to 1.1482, and the Pound to Dollar exchange rate rallying to 1.2285 in the minutes following the data release.

The Pound's rise was attributed to an increase in UK bond yields, signaling that investors perceive the labor market figures as contradictory to the Bank of England's expectations. The strong data suggests a 'tight' labor market, potentially complicating the Bank's efforts to bring inflation back to its 2.0% target.

This unexpected strength challenges recent market expectations for rate cuts at the Bank of England in 2024. Contrary to predictions, HSBC suggests that the first rate cut might occur in early 2025. Despite the cooling labor market, the Bank of England may not implement rate cuts until late 2024, and when they do, the cuts could be more substantial than initially anticipated.

However, beneath the positive headline figures, underlying trends hint at potential challenges in wage growth. Job vacancies are decreasing, and despite real wage growth, signs of a cooling labor market may eventually lead to lower wage growth.

The market's focus now shifts to the midweek inflation release for October, expected to fall to 4.8% from 6.7%. While a larger-than-expected drop might momentarily pressure the Pound, significant upside surprises could raise concerns about the overall economic outlook for the UK. The evolving Bank of England rate outlook, coupled with ongoing economic indicators, will continue to shape the narrative for the Pound in the coming weeks.

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Damon

Forex

Economic

The US dollar tumbled by the most in a year, after soft inflation data led traders to ramp up bets the Federal Reserve (Fed) will start cutting interest rates by mid-2024, sending Treasury yields plunging.

A Bloomberg gauge of the dollar tumbled as much as 1.3% on Tuesday, the largest such drop since November 2022. It stayed close to the previous day's close on Wednesday, helping propel the won and ringgit to the top of Asia's currency rankings. The moves followed a report that showed US headline and core inflation in October slowed more than economists had forecast.

The release of the data set off a major shift across world financial markets, with traders anticipating that the Fed's aggressive rate hikes will succeed in reining in the worst inflation surge since the 1980s. That sent bond yields sliding, sapping the incentive for overseas investors to shift money to the US and fueling a rally in risk assets like US and emerging-market stocks.

The dollar had rallied for much of this year on the back on rising Treasury yields. But that dynamic kicked into reverse on Tuesday, when the dollar lost ground against almost all of the world's major currencies, as traders priced in expectations that the Fed will cut its benchmark rate by about half a percentage point by July.

"Over recent weeks, it seemed as if there was a reluctance to buy into the dollar on data which supported the Fed's higher-for-longer narrative," Simon Harvey of Monex said. "It isn't surprising to see European and high-beta foreign exchange rally against the dollar as rate cut expectations are brought forward."

Among the so-called Group-of-10 currencies, the Australian dollar rallied as much as 2.1% on Tuesday, the largest boost since January, while the euro climbed as much 1.8% in its biggest intraday move in a year. The currencies slightly pared their moves on Wednesday.

Among emerging Asian currencies, the won rose as much as 1.9% to lead gains on Wednesday, followed by the ringgit, which advanced 1.3%.

The yen pulled back from close to a 33-year low against the greenback, a level that had traders braced for possible intervention from Japan to support the beleaguered currency. Japanese Finance Minister Shunichi Suzuki had warned repeatedly this week that the government will respond to excessive moves.

Hawkish bets fade

Fed swap contracts indicate that the odds of another rate increase have fallen to nearly zero, with the timing of a first anticipated rate cut pulled up to May or June. Treasuries rallied across maturities on Tuesday, with the yield on the five-year tenor falling as much as 25 basis points to a low of 4.41%. The 10-year US benchmark was little changed at 4.45% on Wednesday.

The options market sees the drop in the dollar helping to balance currency positions. An index of three-month volatility on the index sunk to its lowest level since February 2022.

"The markets have moved to price in more rate cuts next year and pulling forward the start to the easing cycle," said Paresh Upadhyaya, the director of fixed income and currency strategy at Amundi US. He said there is a "lack of fundamental data in the short term, the high probability of no hike in December, and a market that is wrong-footed that could give this rally some legs".

Source: Bloomberg

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Thomas

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