Pound Sterling remains under pressure despite employment and wage data confirming no material impact of the Brexit vote on the UK labour force.
- Pound to Euro exchange rate today (15/9/16): 1.1745,
- Euro to Pound Sterling exchange rate today (15/9/16): 0.85114
- Pound to Dollar exchange rate today (15/9/16): 1.3197
The Pound saw notable selling pressure as the decline triggered by the release of Tuesday's inflation data extends.
It would appear that decent data releases from the UK economy are no longer enough to convince markets that the Bank of England will not act again in November.
Indeed, Thursday's MPC decision shows the Bank remains ready to cut rates again having noted inflationary growth remaining below their forecasts.
It would also appear the sell-off is technical in nature. Now that the August-September rally has failed sellers are now easily outstripping buyers of Sterling on global foreign exchange markets.
"The turn lower last week looks potentially decisive and may signal a resumption of the downside probing for the Pound," says Shaun Osborne at Scotiabank neatly encapsulating the situation.
Robust Labour Market Data Brushed Aside
Weakness had been temporarily halted by the release of UK Labour Market Data for the month of August, released by the ONS on Wednesday the 14th September.
Figures showed earnings continue to rise with the Average Earnings Index + Bonus (July) reading at +2.3%, ahead of forecasts for +2.1% while the upward revision of the previous month’s figure to 2.5% was seen as an added bonus.
Gains in GBP were capped by news that the UK Claimant Count (Aug) rose 2.4K, ahead of forecasts for a rise of 1.8K.
But the unemployment rate fell to 4.9%, down from 5.5% for a year earlier. The last time it was lower was for July to September 2005. The unemployment rate is the proportion of the labour force (those in work plus those unemployed) that were unemployed.
"Despite a backdrop of increased economic uncertainty in advance of the referendum, today’s report also shows firm employment growth. The numbers employed as of the May-July quarter were 174k higher than in the preceding 3 months, a slight acceleration from the pace recorded last month, although average hours worked fell over the quarter," say Lloyds Bank in response to the data release.
Lloyds do warn that trends in employment do tend to lag other economic indicators therefore any post-referendum slow-down could yet be reflected in upcoming data releases.
There will therefore be no repeat fo the surge in Sterling seen in August following the releaes of stronger-than-forecast employment and earnings data.
The August release sent Sterling on a strong recovery against its peers which ended at the start of September.
On the basis of September's data we do not see enough strength to suggest the Bank of England will avoid cutting interest rates and boosting their asset purchase programme once more in November.
“We continue to expect GDP growth to come to a halt in 3Q16, with the risks to the upside; and while the MPC will almost certainly be on hold tomorrow, we expect the MPC minutes to indicate that a cut remains likely later this year, probably in November,” says Daniel Vernazza at UniCredit Bank in London.
For this reason we would remain wary of waiting for the Pound to rise and would imagine the currency will struggle in the 1.18-1.20 region against the Euro and 1.33+ against the Dollar.
We believe that it was a marked increase in expectations for a November rate rise that saw Sterling shift down notably during the previous day’s FX trading session.
Currency Reaction: GBP Held at Major Support and Resistance Lines
The reaction by Sterling to data over the past 24 hours has been decidedly negative and based on recent momentum we would have to say the Pound remains biased lower.
If anything, that Sterling is not falling could have more to do with the technical support levels at play in the market rather than a positive reaction to today's data.
“The GBP/USD took a negative turn after the UK’s inflation data missed the market expectations. As expected, the negative surprise encouraged a pullback to 1.3296 (this is the major 38.2% retrace on the Aug 29th – September 2nd advance) and 1.3205 (major 61.8% retrace),” says Ipek Ozkardeskaya at London Capital Group.
Ozkardeskaya eyes next support for GBP/USD at 1.3150 (minor 76.4%). Intra-day resistances are eyed at 1.3250 (major 50% level) and 1.3310 (200-hour moving average).
With regards to the EUR vs GBP rate, we hear that the EUR is starting to build positive momentum again and the three week period of GBP strength is now at an end.
"The chart has now taken another step forward in this move back towards the bulls favouring the Euro again with a strong bull candle that was posted yesterday," says Richard Perry at Hantec Markets.
According to Perry 1.1778 appears to be the line above which the GBP/EUR may struggle to cross.
Analysts: These are ‘Early Days’ in the post-referendum Story
The general view of economists following the UK Labour Market report is that it is too early to discount any impact from the Brexit vote.
The one key message we are taking away from economists is that the labour market tends to lag the broader economic cycle, so insights into labour market dynamics from the EU vote are uncertain at this stage.
“The UK is far from out of the woods yet. While the post-referendum data has generally come in better than we and most others (including the MPC) had expected, it’s simply too early to tell the size of the referendum impact on underlying UK economic activity,” says UniCredit’s Vernazza.
Vernazza argues the direction is clear: the UK economy is slowing. “It will take time (a few months) for this to clearly show up in a deterioration in labour market quantities”.
Nevertheless, “the strength of employment growth in the first half of this year is encouraging, and highlights the resilience of the UK’s flexible labour market,” says Neil Carberry, CBI Director of People and Skills.
Carberry says maintaining this flexibility as we navigate the challenges and opportunities the country faces following the EU Referendum will be vital for our future prosperity, pay and job creation.