UK labor market loses steam putting rate hikes at odds

Headline numbers from the November labor market report from the UK’s Office for National Statistics are pretty impressive. At the first glance. The unemployment rate dwelled at a 42-year low in September, the nominal weekly earnings rose 2.2% over the year with and without bonuses and the number of people claiming unemployment benefits rose 1.1K in September only.

So why GBP/USD initially knee-jerked up but sold out lower in the follow-up of the report?

It is because the first glance does not reveal the trends behinds the headline numbers.

First, there were 8.88 million people aged 16 to 64 who were economically inactive in September And that is by 117K more than in April-to-June period, but still  20K less than a year ago. The UK economy has shed 225K jobs just over the past two months.

Falling compared to previous months, but still better than a year ago means that the momentum the economy received in late 2016 is fizzling out of the UK labor market and currently lower economic growth rate is just not enough to keep indicators improving.  

Such a scenario is detrimental to the monetary policy stance. Current outlook of the Bank of England is largely based on assumptions of a strong and resilient labor market that will eventually end up in higher wages as early as at the beginning of 2018. The Bank of England expects average hourly earnings growth to hit 3% next year.

The Bank of England has provided ultra-dovish outlook for the Bank rate to rise by additional 25 basis points rate hike in next three years, but with employment faltering and Brexit negotiations stalling, it may not be enough for wages to pick-up that quickly making the Bank of England a prisoner of even more dovish outlook ruling out any rate moves in 2018.

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