UK jobs report preview: one upside risk, one downside risk, and the Brexit shadow

UK pay is rising at a rate above 3% while the unemployment rate is holding below 4%. In a normal world, inflation would be on the rise, the Bank of England would be raising rates, and the pound would be dear.

These are not normal times. Since the financial crisis, a high level of employment does not translate into higher inflation. And in Britain's case, the looming uncertainty about the UK's exit from the EU paralyzes policymaking and the pound's movements. 

Nevertheless, labor data is always of interest and Sterling tends to react to the data, even when Brexit headlines are crossing.

The upside and downside risks

Wage growth stood at 3.5% on an annual basis in February and 3.4% when excluding bonuses. In the upcoming publication for March, both measures of pay are set to decelerate by 0.1%: the headline to 3.4% and ex-bonuses to 3.3%.

Low expectations leave room to an upside surprise that could lift the pound. Both gauges may have remained at recent levels or may have risen given the low jobless rate and the bump up in growth in the first quarter: 0.5%.

So, the wage data, which tends to have the most substantial impact on the pound, may surprise to the upside and boost Sterling.

The downside surprise comes from the unemployment rate. A rate of 3.9% is extremely low and may not hold for a long time. An increase may also stem from the ongoing rise in the claimant count change, or jobless claims. 

Claims have risen by 28.3K in March with 24.2K forecast for April. So far, this increase has not been reflected in the unemployment rate, but the day of reckoning may be nearer than we think. 

An increase to 4% would not be terrible news for UK workers, but Sterling may suffer. Any change in claims will likely be ignored by markets, which will wait to see if such an increase feeds into the jobless rate.

All in all, wages may surprise to the upside while the unemployment rate may disappoint.

Brexit blues

Cross-party Brexit talks are stuck at the time of writing. The government does not want to cave into the opposition and accept a second referendum. It may tear the Conservative Party apart. And the opposition does not want to "flog a dead horse", risking cutting a deal with a PM that is on her way out. 

Brexit also paralyzes policymaking. Not only does Whitehall have no free time to deal with anything else outside the UK' departure, but also the Bank of England has no room for raising rates or acting in any way until some of the fog clears. 

The Brexit impasse is also taking its toll on GBP/USD volatility, which is limited. The reaction to any outcome will likely be short-lived, as we have seen with so many previous British data points. 

Conclusion

GBP/USD has room to rise on an upside surprise in wage growth, to the downside on a rise in the unemployment rate, and sideways as Brexit clarity is awaited as ever.