GBP flows: GBP up on slightly stronger labour market data
Earnnigs growth slightly on the strong side and unemployment rate diown, but GBP upside still quite limited
UK labour market data is on the strong side of expectations, with earnings on the high side of expectations at 6.2% y/y ex-bonuses and 5.8% y/y including bonuses, and the unemployment rate falling sharply to 3.8%. The decline in the unemployment rate is due in part to the decline in economic activity, but employment also rose, albeit in line with market expectations at 72k in the 3 months to December. However, the more up to data HMRC data was also on the strong side, with payrolled employment up 48k in January and revised to a gain of 31k in December after initially being reported as having declined by 24k. Earnings growth on the HMRC measure was also up slightly in January to 6.4% y/y from 6.3% in December. Having said this, the level of median monthly pay, while up slightly from December is essentially unchanged from November, so appears to be stabilising in the last few months.
All in all, the data is consistent with a stabilisation in earnings and employment, but isn’t showing significant weakness at this stage. The level of earnings growth will still be seen as too high by the hawks on the MPC, although the strength of the y/y measure conceals stabilisation in recent months. There is nothing in the numbers to indicate any urgency for a rate cut, and there shouldn’t be any significant impact on expectations of BoE policy.
GBP has initially reacted slightly positively as the data was modestly above market consensus, with EUR/GBP around 15 pips lower. But we don’t see much scope for a widening of yield spreads in GBP’s favour, and with EUR/GBP already trading below the level suggested by current yield spreads, we would expect support at the 0.85 level to hold near term, though a mild downside bias is likely to endure.