Pound higher after strong UK labour data

OVERNIGHT

Equity markets gained during the Asian trading session ahead of today’s US CPI report and tomorrow’s expected Fed policy ‘pause’. Japan’s Nikkei 225 was up nearly 2%, and European and US equity futures are trading higher. Investors also took note of the decision by China’s central bank to reduce short-term interest rates, raising speculation of broader policy easing ahead. 

THE DAY AHEAD

The first of two major UK data releases this week was published earlier this morning. The labour market report showed solid employment growth of 250k in the three months to April, tallying with recent survey evidence pointing to a pickup in hiring intentions. The unemployment rate fell to 3.8% and there is little evidence of easing wage pressures, with annual growth in average weekly earnings (excluding bonuses) rising more than expected to 7.2% from 6.8%.

Early tomorrow (07:00BST), UK monthly GDP figures for April will be released. We expect it to have risen by 0.3%m/m, with services activity supported by a rebound from the impact of unusually wet conditions in March as well as fewer strikes. Better weather also probably supported construction activity. Industrial production, however, is forecast to have fallen, reflecting more challenging global conditions. The Bank of England no longer expects a recession this year and it sees underlying quarterly growth of 0.2% in the first half of the year (excluding one-off factors such as the impact of public sector strikes and the extra bank holiday for the King’s Coronation).

Staying in the UK, new MPC appointee Megan Greene will appear at a Treasury Select Committee hearing this morning. She is due to replace Tenreyro who is considered to be the most dovish MPC member. Separately, BoE Governor Bailey is scheduled to appear at a House of Lords committee on central bank independence and the MPC’s Dhingra (dovish) will make a speech later today.

This afternoon’s US May CPI inflation is forecast to show a decline to 4.2% from 4.9% while the core rate (excluding food and energy) is predicted to fall to 5.3% from 5.5%. The Fed will begin its two-day policy meeting today and, as noted above, is expected to ‘pause’ after raising interest rates in the past ten meetings. However, it is expected leave the door open to more tightening. 

In Europe, this morning’s German ZEW survey is expected to show a fourth straight fall in the expectations index but that is not likely to deter the ECB from hiking rates again on Thursday. 

MARKETS

The pound rose after this morning’s solid UK labour market data. GBP/USD increased above 1.2550, although it remained below yesterday’s high of just below 1.26, while GBP/EUR was only slightly firmer. Markets have fully priced in a 25bp rise in Bank Rate by the BoE next week to 4.75% and anticipate more hikes through the summer.