UK jobs data keeps questioning the need for rate hikes

What the desk is arguing

The latest UK employment figures cast doubt on the urgency of further rate hikes by the Bank of England. Despite a headline decline in unemployment, detailed scrutiny reveals ongoing weaknesses in sectors that drive consumer spending, suggesting that the BoE may maintain its current rates through 2023. Per the full note from ING, the persistent drop in private sector payrolls and slowing wage growth warrant caution and indicate that the economic recovery may not be as robust as initially perceived.

Specifically, the report highlighted a revised drop in payrolls, with an April loss of 53,000 following an initial report of 100,000. This downward revision signals that while May's figures may seem superficially promising, they are underpinned by significant declines in sectors critical for economic momentum, particularly where consumer interaction is prevalent. Wages, while showing some resilience due to public pay increases, do not reflect the same growth in the private sector, suggesting potential stagnation ahead.

Where it sits in our coverage

Our consensus target for GBP/USD stands at 1.075, with a range of 1.04 to 1.12. Notably, firms such as: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) indicate differing views on the currency direction under these macroeconomic conditions.

This cautious view is more pessimistic than the broader market consensus which may position a more aggressive tightening bias. The desk’s position suggests alignment with jpmorgan and leans towards the lower bound of the range, emphasizing a cautious approach moving forward.

How other firms see it

Firms aligned with a cautious view of the UK economy include jpmorgan, which expects GBP to weaken due to underlying economic vulnerabilities. In contrast, bofa holds a more optimistic outlook with a stronger pound forecast, reflecting a divergence in market interpretations of the ongoing economic signals.

Key indicators to monitor include consumer spending trends and potential shifts in the BoE's monetary policy stance. Specifically, the GBP/USD exchange rate's fluctuations will be closely tied to any forthcoming commentary from the Bank of England regarding interest rates.

What the calendar says

With no major economic events on the immediate calendar, the focus will remain on the evolving sentiment around UK monetary policy, especially ahead of future BoE meetings scheduled for later in the year. The absence of data releases may leave the market reactive to global trends until more definitive local indicators arise.