The pound to US dollar exchange rate has strengthened during the early Tuesday morning in Europe following the release of upbeat UK data. UK claimant count change fell to -56.9K and the unemployment rate was also lower to 3.7%. The positive numbers have boosted sentiment with traders expecting further upside.

At the same time, there is some unease ahead of a speech from Fed Chairman Jerome Powell, as well as any Brexit announcements that could limit potential gains for the British currency.

Claimant count change for April

The UK claimant count change for April dropped below the -38.8K which was forecast and the -46.9K in previous readings to -56.9K. The claimant count change refers to the additions in the unemployed labour force who have applied for jobless benefits. Today’s reading demonstrates a tight labour market.

ILO Unemployment Rate falls to 3.7% in March

On Tuesday, it was reported by the UK's Office for National Statistics that the ILO unemployment rate fell to 3.7% in the three months to March from 3.8%. The reading was slightly lower than the market expectation of 3.8%. The ILO unemployment rate released by the National Statistics refers to the number of unemployed workers divided by the total civilian labour force. It is an important indicator for the UK economy and the labour market in particular and shows lack of expansion and a weak economy when the rate is up, while a decrease of the number is considered positive. It is worth to note that here is a substantial reverse correlation between unemployment and inflation. A higher-than-expected unemployment rate tends to push the pound lower.

Also released today, was the average earnings including bonus and excluding bonus which rose by 7% and 4.2%, respectively, on a yearly basis.

The optimistic UK employment numbers reinforce market expectations for faster rate hikes bybthe Bank of England (BOE). However, analysts noted that this has been priced in and that the pound could find further direction from new developments. Sterling was also supported by a slightly weaker US dollar as market sentiment recovered following Covid headlines from China and disappointing US data and Fedspeak.

What to look forward to today

Looking forward, today’s speech from Fed Chairman Jerome Powell will be important for the GBP/USD currency pair with markets anticipating Powell to defend a 50-bps rate hike. If he does not mention this, the US dollar could weaken.

At home, UK PM Boris Johnson is expected to release details of changes to the Northern Ireland Protocol (NIP). The PM has confirmed he will propose legislation to overrule the Northern Ireland protocol, despite warnings from Brussels and a request from the Bank of England not to initiate a trade war with Europe. The prime minister said his government wanted to “fix” the protocol and not to “scrap it.”

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UK unemployment rate fell to 3.8% in February and wages increased, lending support to the pound.

According to data released from the Office for National Statistics (ONS) on Tuesday morning, UK average weekly earnings rose 5.4% in February. The data reflects persistent wage inflation, which should encourage the Bank of England to raise interest rates again in May. The wage and employment data comes at a time when UK economic momentum is falling, while inflation is rising, and this could push the pound lower.

With higher inflation, weaker consumer confidence and higher credit growth, the outlook for the pound seems disappointing.

UK jobs report

The UK’s unemployment rate fell below its pre-pandemic levels to 3.8%, but these was due to employers hiring less staff and people leaving the labour force. Regular pay fell by 1% over the last year after adjusting for inflation.

Employment rose with 32,485 people currently employed. UK employment rate remained at 75.5%, 1.1% lower than before the pandemic.

The ONS noted that economic inactivity rate increased by 0.2% to 21.4% in December 2021 to February 2022, with 76,000 more people becoming economically inactive, as many were looking after home or family, retired or were sick. Today’s jobs report has shown that 487,000 more people were considered economically inactive, mostly older workers, due to long-term sickness. Long Covid is expected to be the main cause for this increase.

Responding to today’s release of labour data, Minister for employment, Mims Davies, said: “With the unemployment rate returning to the lowest we have seen in nearly 50 years, it is clear our Plan for Jobs has worked – protecting livelihoods and businesses throughout the pandemic. Behind these ONS figures we know this is a difficult time for many workers and families. We’re doing everything we can to help, with our Way to Work scheme which is supporting people coming through the doors of our Jobcentres to move into better paid, higher skilled work. As well as increasing the National Living and Minimum Wage all backed up by over £22bn of targeted investment.”

Ben Harrison, director of the Work Foundation thinktank, said that more government help for struggling households was needed since today’s statistics showed “a mixed picture for the UK’s labour market recovery with employment stationery at 75.5% and unemployment dropping to 3.8%. However, the vacancy rate remains high at 1.3 million, and economic inactivity continues to rise to 21.4%. Crucially, workers and job seekers are being hit by the largest fall in living standards on record as inflation outpaces wage growth. Many are struggling to make ends meet as regular pay growth is at 4% (excluding bonuses) but inflation continues to rise, with the Bank of England predicting inflation will reach 8% in spring and could rise further later in the year.”

Bank of England

The data today is expected to reinforce the case for further interest rate hikes by the Bank of England. Some economists believe the Bank will proceed to hike by another 25bp at its next meeting in May, but they believe the hiking cycle will end there, with no further rate hikes. They noted that the market will begin to adjust its interest rate hike expectations lower and this will hurt the pound.

There are also increasing concerns that the British economy is facing a recession, and this is why the BoE is cautious and less aggressive about tightening monetary policy.

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The pound has remained supported despite US dollar strength, helped by positive jobs data released this Tuesday morning. The good UK jobs data is also supporting expectations of further interest rate hikes by the Bank of England (BoE).

Chancellor of the Exchequer, Rishi Sunak, has welcomed today’s data and said that the “figures are proof that the jobs market is thriving, with employee numbers rising to record levels, and redundancy notifications at their lowest levels since 2006 in December.”

Unemployment rate drops

The jobless rate fell to 4.1% during the quarter of September and November, according to the Office for National Statistics. After the end of the furlough scheme, the labour market has proven to be resilient and has continued to grow stronger in November. While wage growth slowed down, it remained above 4.2%.

The ONS estimates that employers added 184,000 more staff in December, pushing payrolls higher, to 409,000, which represents 1.4%, above pre-pandemic levels.

Vacancies increased too, with 1,247,000 vacancies in October-December. Most industries have shown a high number of vacancies, but the ONS warned that the rate of growth in vacancies has slowed. There are 462,000 more vacancies than before the pandemic. The redundancy rate has fallen which means that the end of the furlough scheme did not significantly affect the jobs market.

Economic inactivity rate rose by 0.2% to 21.3%. This suggests that an increasing number of people have left the labour market, either because they have retired, started studying or are ill.

Consumer price inflation (CPI) rose to 5.1% in November and is expected to hit 6% by this spring when energy bills increase.

Wages

The ONS reported that wages fell as prices rose in November: “In real terms (adjusted for inflation), total and regular pay have shown minimal growth in September to November 2021, at 0.4% for total pay and 0.0% for regular pay; single-month growth in real average weekly earnings for November 2021 fell on the year for the first time since July 2020, at negative 0.9% for total pay and negative 1.0% for regular pay.” The ONS showed that public sector was hit by the pay squeeze: “Average total pay growth for the private sector was 4.5% in September to November 2021, while for the public sector, it was 2.6%; all sectors saw growth, with the finance and business services sector seeing the largest growth rate at 6.8%.”

Cost of living

The UK’s cost of living is going to get worse according to Stephen Evans, chief executive of Learning and Work Institute. He warned that 2022 “will be dominated by the cost of living crunch and labour shortages.” He stressed that today’s data has shown that prices rose faster than wages, and with inflation pushing higher and further tax rises households will struggle. He clarified that the total number of working people was still below pre-pandemic levels, while the growing number of those being sick meant that there are now one million less people working than before the pandemic.

The chancellor, Rishi Sunak, highlighted the positive figures and said the government’s plan for jobs was creating opportunities for all including traineeships for young people and sector-based work academies for those changing careers.

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