The GBP/USD exchange rate fell to a 12-week low of around 1.2818, as the US dollar continued to maintain a strong tone. Despite the latest UK wage data being stronger than expected, traders focused on rising unemployment and the depreciation of the Pound sterling in response to the data.
Indications are that the weak labor market could prompt the Bank of England to take steps towards further interest rate cuts, although there are reservations about the pace of wage growth. UK labor market data showed the unemployment rate rose to 4.3% in the three months to September, a four-month high, compared to 4.1% in the previous period, and beating market expectations for no change.
Slight declines in the number of employees on the payroll were also reported for September and October, while job vacancies continued to fall for the 28th consecutive month. On the other hand, average core earnings rose by 4.3% compared to 3.9% in the previous period, beating expectations, but core earnings slowed slightly to 4.8%, the lowest in two years, compared to expectations of 4.7%. In a commentary by Barclays Research, it was noted that the UK labor market data was mixed.
While weekly wages recorded a surprise increase of 4.3% year-on-year, the unemployment rate rose to 4.3%, beating Barclays’ expectations of 4.2%. Barclays believes that the economic impact of the government’s budget may not be fully reflected in this data, but it expects it to start to show in the coming months, in light of concerns about rising National Insurance costs that may prompt companies to preemptively cut jobs.
EUR/Pound sterling after UK labor market data
EUR/GBP gained some strength to reach 1.2072 during the European session on Tuesday, following mixed UK labor market data. Attention now turns to the German ZEW survey for November, due later today.
According to data from the Office for National Statistics, the UK unemployment rate rose to 4.3% in the three months to September, compared to 4.0% in the previous period, weaker than the forecast of 4.1%. In contrast, the number of people claiming unemployment benefits rose by 26,700 in October, compared to 10,100 in the previous month, which was below market estimates of 30,500.
Meanwhile, data showed that wage inflation, as measured by average earnings excluding bonuses, rose 4.8% year-on-year in September, compared to 4.9% in August, beating market estimates of a 4.7% increase. Average earnings including bonuses also rose 4.3%, compared to 3.9% in the September quarter.
The data put pressure on the pound, with the market seeing some immediate pullbacks after the UK employment report.
In other news, European Central Bank policymaker Robert Holzmann said on Sunday that there was nothing stopping the bank from cutting interest rates in December, noting that the decision would depend on upcoming economic data. These expectations of a rate cut by the ECB could influence market sentiment, with markets anticipating a 25-basis point cut, with a 20% chance of a larger 50 basis point cut. These weak economic signals have led to speculation that the Bank of England may delay raising interest rates, especially in light of the decline in private sector wages, as reported by Capital Economics.
Pound sterling falls to three-month low: local and global economic implications
The Pound sterling has fallen to its lowest levels in three months against the dollar and the euro, following the release of weak British economic data, in addition to the strength of the dollar following the US elections. What are the causes and effects associated with this decline?
What does this decline mean?
The decline in the pound reveals a set of local and global pressures affecting its value. The latest British economic data showed a significant slowdown in wage growth (excluding bonuses), which is the slowest in more than two years, in addition to an increase in the unemployment rate to 4.3% in September.
On the other hand, the increasing strength of the US dollar after the US elections exacerbated this decline, with the dollar rising by 2% since Donald Trump’s victory. This rise in the value of the dollar reflects expectations of changes in US trade policies, which increases pressure on European markets and currencies such as the euro, which are also experiencing pressure due to the increasing challenges in global trade policies.
For markets, the decline in the pound is an indicator of significant economic impacts on UK businesses, particularly in the areas of imports and exports. Companies that rely on international trade may face difficulties due to currency fluctuations. On the other hand, investors consider a stronger dollar an attractive factor for US markets.
Global economic impacts
Recent currency fluctuations reveal broader shifts in the global economy. Trump’s victory helped strengthen the dollar, which puts pressure on trading partners in Europe who expect tighter trade policies. These shifts in economic policies may lead to radical changes in global trade and investment flows, reflecting the interconnectedness of different economies and underscoring the importance of political decisions in influencing global financial stability.
