Sterling Hits 4 month Peak Following Robust Labor Data


Sterling rallied to new trend highs following the above-forecast UK wage data and a new cycle low in the unemployment rate. This will bring forward BoE tightening expectations, despite the April claimant count coming in with nearly half the expected decline. Cable bolted to a four-and-a-half month peak at 1.5747, with the next level of target resistance the mid-December highs at 1.5835. Today’s data follows yesterday’s UK March industrial output figures, which imply a modest upside revision to Q1 GDP.

UK labor data show warmer than expected wage data and a new cycle low in the unemployment rate to 5.5% in March. This matches the BoE’s NAIRU estimate which is the point at which the central bank estimates would start to trigger inflationary pressures via higher wage demands. Average household income came in at 1.9% year over year in the including-bonus figure in the three months to March, slightly above the median for 1.8%, while the ex-bonus rose by 2.2% year over year, also modestly above the median forecast for a 2.1% rise. The jobless rate and wage figures offset sub-expectation outcomes in the April claimant count, which fell by 12.6k versus the -21.0k median and about half the recent underlying trend, and claimant count rate, which remained at 2.2% versus the expectation for a dip to a new cycle low of 2.1%.

The BoE cut its 2015 GDP forecast to 2.5% from 2.9% in the May edition of its Quarterly Inflation Report. 2016 growth is expected at 2.6%, revised down from 2.9%. It also said that the first rate rise would take place in Q2 2016. The BoE projected inflation to average a 0.6% year over year rate this year, slightly higher than its estimate of 0.5% three months ago. Inflation is also expected to average 1.8% in 2016, below the 2.0% target. The unemployment forecast was trimmed to 5.2% from the previous forecast of 5.4%, and to 5.1% in 2016, near the banks’ natural rate estimate of 5%. Productivity is expected to remain weak, and weekly earnings are expected to grow by just 2.5% this year, down from 3.5% estimated previously. The BoE expects spare capacity to be eradicated by next year.

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