GBP: The British Chancellor of the Exchequer's concerns are likely to grow further – Commerzbank

Yesterday's British labour market data reinforced the concerns of those backing the United Kingdom. The unemployment rate rose as expected, wage growth slowed unexpectedly, and the number of people in employment fell by around 109,000. The latter figure attracted particular attention because it was the largest decline since the pandemic peak and because job creation has virtually collapsed since the British Chancellor's budget announcement in October, which was followed by an increase in social security contributions for companies, Commerzbank's FX analyst Michael Pfister notes.

UK labour market weakens, casting doubt on economic resilience

"At this point, however, it is important to put things into perspective. Job creation figures are often significantly revised in retrospect (for example, the figure initially published in April 2023 was similarly low, but was later revised significantly upwards). Labour market data should also be treated with caution given the problems with the survey, and a slowdown was to be expected given the restrictive monetary policy."

"Despite these arguments, yesterday's data showed that the UK's real economy is not as stable as the strong growth figures for the first quarter suggested. This is a challenging situation for the Chancellor of the Exchequer, who must present her first spending review today. Further difficult decisions regarding savings and higher revenues will probably have to be made, which are likely to exacerbate the difficult economic situation in the coming months."

"Therefore, it should come as no surprise that the market is now pricing in significantly more interest rate cuts by the Bank of England this year than at the beginning of the year. As we have emphasised several times, the path towards a stronger pound remains narrow, even if we do not want to overinterpret a single data release."