UK labor market Preview: Deceleration in UK wages beyond scope of the market forecast is set to weigh on Sterling

The UK labor market report for the month of September is set to see the unemployment rate stuck to a four-decades low while claimant count is expected to increase only slightly and most importantly the UK wages are expected to have decelerated during the summer months, the Office for National Statistics is scheduled to announce on Tuesday at 8:30 GMT.

According to the UK report on jobs, the labor market conditions remain tight with starting salaries rising sharply amid a steep reduction in candidate supply and vacancy growth softening to nearly two-year low, the IHS/Markit survey showed on October 5. These conditions point to solid wage growth in the UK, but the regular pay (excluding bonuses) is expected to decelerate to 2.8% y/y in three months to August while total pay (including bonuses) is expected to decelerate at the same time to 2.4% y/y. Any softening below the current rate of market expectations is likely to add pressure on Sterling that rose last week slightly backed by Brexit deal hopes and expectations of the gradual rate hike path.

Commenting on the market expectations on pay rise and the UK labor market conditions the Bank of England chief economist Andy Haldane said last week that market expectations of 25 basis points a year increase in policy rates are "not dissimilar" to the Bank’s own forecasts for pick up in wage growth over the next 3 years. Haldane also said he sees longer-term threats to pay growth from reduced worker bargaining power, automation, and business monopolies.

The UK is mired by Brexit uncertainty with no immediate bright future for Brexit deal after the bilateral discussions of the UK Brexit Secretary Dominic Raab and the European Union chief Brexit negotiator Michel Barnier collapsed on Sunday. The European Union diplomats also said that this week´s EU Brexit Summit may not produce a Brexit breakthrough.

Solid rise in the UK wages could see Sterling surging higher further possibly targeting 1.3170 level representing the 50% Fibonacci retracement of the upmove from 1.2030 to 1.4377. 

The unemployment rate in the UK is at the lowest level since December 1974-February 1975 three-month average of 4.0% and it is expected to remain unchanged. The reason is that the number of people seeking the unemployment benefits is rising relatively slowly with only 10.0K new unemployment benefits seekers in September expected only. 

“With Brexit looming a comprehensive mobility deal with the EU will be needed to underpin prosperity,” Neil Carberry, chief executive at Recruitment & Employment Confederation compiling the UK report on jobs wrote on October 5.

UK nominal wage growth