PoundSterlingLIVE - The British Pound's initial reaction was to go higher following the release of a UK labour report that roundly trounced analyst expectations and suggested the UK would continue to see elevated inflation levels as a result of elevated wage settlements.
The slate of above-consensus labour market statistics suggests the Bank of England is still some way off from cooling the economy enough to bring down inflation.
The UK's June jobs report revealed the unemployment rate unexpectedly fell to 3.8% from 3.9% in March, whereas the market was in fact looking for a pick-up to 4.0%.
The surprise was driven by a strong rise in employment of 250K in the three months to April, surpassing the 182K recorded in the three months to March and consensus expectations for a fall to 150k.
The decline in unemployment comes despite more people entering the jobs market again as the ONS reported the economic inactivity rate decreased on the quarter (-0.4pps) and on the year.
The Pound to Euro exchange rate rose in the immediate aftermath of the data release, going to 1.1632 as it Sterling looked to recoup some of its previous day's losses. The Pound to Dollar exchange rate extended a recovery to 1.2562.
The claimant count further highlighted 'tightness' in the UK labour market as it showed a fall in those seeking out-of-work benefits in the month of May (-13.6K), whereas the consensus expected 12.4K to be added to the benefits list. (23.4K were added in April).
The payrolls report meanwhile provided more surprises with the Average Earnings Index (+Bonus) showing a 6.5% increase in wages in April, surpassing expectations for 6.1% and March's 6.1%. Excluding bonuses, the index showed a 7.2% increase in wages for April, easily passing expectations for 6.9% and March's reading of 6.8%.
Make no mistake, this is a 'hot' jobs report and suggests the economy is proving far more resilient than economists had expected in the face of high inflation and rising central bank interest rates.
The Bank of England will have little choice but to continue raising interest rates in this environment, for fear inflationary expectations are becoming entrenched.
The evidence provided by the jobs report is that workers are seeking and getting pay awards, which combined with higher pricing intentions at businesses, risk creating a wage-price spiral.
Job vacancies meanwhile continue their decline with the March-May 2023 period showing the estimated number of vacancies fall by 79,000 to 1,051,000, making for the 11th consecutive period of decline since May-July 2022. Vacancies nevertheless remain elevated by historical standards and are well above pre-pandemic levels.
What does this mean for the Pound's prospects?
The Pound remains one of 2023's top performers, driven by consensus-beating economic data releases, of the kind we have seen today.
Therefore, on balance, the jobs report is supportive, particularly as it will firm expectations for at least another 100 basis points of Bank of England interest rate hikes from here.
It must be noted, however, that such a hike in interest rates could well prompt an economic recession on the horizon, something that makes markets nervous.
Indeed, on Monday we saw UK borrowing costs rise (two-year bond yields surged to their highest levels since the mini-budget debacle), yet the Pound fell sharply.
Typically the Pound would be expected to track yields higher, but the decline hints at some trepidation in the market as to the fiscal and economic outlook.
In short, markets are worried that the combination of high borrowing costs amidst stubborn inflation is a negative combination for UK assets.
As such, while upside in the Pound is still preferred, there are some signals that the rally might be at risk.
An original version of this article can be viewed at Pound Sterling Live
