Key Takeaways
- The Pound Sterling (GBP) experienced a significant decline against major currencies on Tuesday.
- This drop is attributed to disappointing UK labor market data for the three months ending September, showing a net job loss.
- The ILO Unemployment Rate rose to 5%, its highest point since March 2021, further fueling expectations of a Bank of England interest rate cut.
- Wage growth figures remained moderate, with Average Hourly Earnings excluding bonuses rising by 4.6% annually.
- Upcoming UK GDP data for Q3 is anticipated to show slower economic growth.
UK Labour Market Weakens, Sterling Falls
The Pound Sterling (GBP) faced a sharp downturn against its major currency counterparts on Tuesday. The British currency depreciated as the latest UK labour market data, covering the three months through September, indicated a further deterioration in job market conditions.
📊 The Office for National Statistics (ONS) reported that employers shed 22,000 jobs. This contrasts with the net gain of 91,000 jobs recorded in the three months leading up to August. This marks the first overall reduction in the UK workforce since the period ending March 2024.
⚡ Additionally, the ILO Unemployment Rate increased to 5%, surpassing economists’ estimates of 4.9% and the previous reading of 4.8%. This represents the highest unemployment rate observed since March 2021.
These signals of a weakening job market are expected to strengthen the case for an interest rate cut by the Bank of England (BoE) at its upcoming December policy meeting. This sentiment has already been building, particularly after the BoE removed the word careful from its gradual monetary easing guidance in its recent Monetary Policy Statement.
Economic Indicators and Market Reactions
Meanwhile, Average Hourly Earnings, excluding bonuses, a key gauge of wage growth, increased at a modest annual pace of 4.6%, meeting expectations. This is slightly down from the 4.7% growth recorded in the three months ending August. Average Earnings, including bonuses, also showed slower growth, rising by 4.8% compared to expectations of 4.9% and the prior 5%.
GBP/USD Analysis and Outlook
The Pound Sterling saw a significant decline against the US Dollar (USD), trading near 1.3120 during Tuesday’s European trading session. The GBP/USD pair faced considerable selling pressure following the release of underwhelming UK employment figures.
📍 In contrast, the US Dollar maintained a broadly stable position, supported by the US Senate’s advancement of a government funding bill to the House of Representatives. House Speaker Mike Johnson indicated optimism for the bill’s passage by Wednesday.
⚡ At the time of reporting, the US Dollar Index (DXY), which measures the Greenback’s performance against six major currencies, was trading flat around 99.60.
✅ Investors are now closely watching for clues regarding the Federal Reserve’s (Fed) potential for further interest rate cuts this year. Market analysis suggests a 62.4% probability of the Fed implementing a 25 basis points interest rate cut in December, bringing the target range to 3.50%-3.75%.
💡 Economic data, previously impacted by a government shutdown, is expected to resume, providing clearer guidance on the Fed’s interest rate outlook.
Future Economic Triggers for GBP/USD
Looking ahead, the crucial catalysts for the GBP/USD pair will be the upcoming UK Gross Domestic Product (GDP) data for September and the preliminary reading of the Q3 GDP. Economists anticipate that the UK’s Q3 GDP growth will moderate to 0.2%, a slowdown from the 0.3% expansion seen in the second quarter.
Technical Outlook for Pound Sterling
The Pound Sterling has shown a bearish trend, trading below the 200-day Exponential Moving Average (EMA), which is currently situated around 1.3264.
📊 The 14-day Relative Strength Index (RSI) is struggling to surpass the 40.00 level, suggesting potential for further downside if momentum continues to wane.
📍 Key support for the GBP/USD pair is identified near the April low of 1.2700. Conversely, resistance is observed around the October 28 high of 1.3370.
Economic Indicator: ILO Unemployment Rate (3M)
ILO Unemployment Rate (3M)
The ILO Unemployment Rate, published by the UK Office for National Statistics, represents the number of unemployed individuals as a percentage of the total civilian labor force. It serves as a leading indicator for the UK economy. An increase in this rate typically signals a lack of expansion in the UK labor market, potentially leading to a weakening of the economy. Generally, a decrease is viewed as positive for the Pound Sterling (GBP), while an increase is considered negative.
The Unemployment Rate is the broadest indicator of Britain’s labor market. The figure is highlighted by the broad media, beyond the financial sector, giving the publication a more significant impact despite its late publication. It is released around six weeks after the month ends. While the Bank of England is tasked with maintaining price stability, there is a substantial inverse correlation between unemployment and inflation. A higher than expected figure tends to be GBP-bearish.
Final Thoughts
The recent UK labor market data has painted a concerning picture, leading to a notable depreciation in the Pound Sterling. The rising unemployment rate and job losses are increasing the likelihood of an interest rate cut by the Bank of England, a move that could further influence currency markets.
Investors will be closely monitoring upcoming economic indicators, particularly GDP figures, for a clearer understanding of the UK’s economic trajectory and its impact on the GBP.
