Pound Gains as Signs of Robust Jobs Market Defy Rate-Cut Bets

(Bloomberg) — The pound gained on signs the UK jobs market is robust, putting into question bets the Bank of England will deliver two more interest-rate cuts this year.

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The currency jumped 0.3% to trade above $1.28 on Tuesday after data showed the unemployment rate unexpectedly fell 0.2 percentage points to 4.2% in the three months to June. Money markets initially trimmed bets on monetary easing, pricing in about 40 basis points of cuts over the rest of 2024 compared to 42 basis points Monday, before paring the move.

The latest gains add to sterling’s recovery from a drop over the past month, as global market volatility led investors to cut net long positions that had reached an all-time high. The pound is still the best-performing Group-of-10 currency this year, largely on bets the BOE will keep rates relatively lofty.

“Sterling should push further higher and retain its bid tone,” said Neil Jones, a foreign-exchange salesperson to financial institutions at TJM Europe, citing the unemployment data. Wage increases “are still alarming for the BOE and not conducive to further cuts.”

The market reaction was contained by ongoing doubts over the reliability of the data alongside the fact separate figures showed regular wage growth cooled to 5.4%. Yet the idea of job creation in what was meant to be a slowing labor market is increasingly making the UK look like an outlier.

The jobs market numbers are the first of a string of economic data releases this week, which will help policymakers decide on the path for interest rates. The BOE’s Monetary Policy Committee voted 5-4 to cut rates by a quarter point earlier in August, taking the benchmark to 5%.

On Monday, hawkish BOE rate-setter Catherine Mann warned policymakers not to be “seduced” by headline inflation falling to the 2% target, pointing to lingering pressures in the jobs market.

The next big event is the UK inflation report on Wednesday. Consumer price growth is expected to have picked up for the first time this year to 2.3% in July from 2% in the two previous months as a favorable tailwind from energy bills fades out of the figures.

“The concern for the BOE will be the signal the data is sending about the underlying strength of the labor market,” said Stuart Cole, head macro economist at Equiti Capital. “With tomorrow’s CPI data also expected to show inflationary pressures starting to creep upwards again, once everything has been digested the market conclusion may well be that a further rate cut being seen this year is not a done deal yet.”

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