The British pound edged higher against both the dollar and the euro on Tuesday following mixed labor market data, signaling that the Bank of England (BoE) could be on track to lower interest rates next month, albeit cautiously.
According to official data, British pay grew at its slowest rate in over two years in the three months leading up to August. However, the unemployment rate fell to 4%, its lowest level this year, and employment saw its largest recorded jump.
Despite these figures, the UK’s statistics agency issued a caution about the accuracy of the Labour Force Survey, citing declining response rates, which may have led to an overstatement of employment growth and the drop in unemployment.
Matt Swannell, chief economic advisor to the EY ITEM Club, commented, “Ongoing problems with the Labour Force Survey means the EY ITEM Club doubts that the labor market is really as tight as the latest data implies.” He also noted, “The pay data will give the Bank of England more confidence that inflation persistence is easing, increasing the likelihood of a 25 basis point cut in Bank Rate at its November meeting.”
This year, persistent inflation in the UK has supported the pound as analysts expected the BoE to delay cutting interest rates. However, shifting expectations in recent weeks have caused the pound to weaken.
The pound was last up 0.2%, trading at $1.3084, slightly above last week’s one-month low of $1.3011.
BoE Governor Andrew Bailey recently suggested that the central bank could cut rates more aggressively if inflation continues to ease. A key reading on British inflation is due on Wednesday, with the headline consumer price index expected to drop to 1.9%, below the BoE’s 2% target for the first time since mid-2021.
Francesco Pesole, an FX strategist at ING, said, “The BoE has more room than other central banks to catch up on the easing cycle,” but emphasized the importance of Wednesday’s CPI data.
Futures markets are currently pricing in a 20 basis point rate cut for the BoE’s November meeting, with an 80% chance of a quarter-point cut. Against the euro, the pound rose by 0.1% to 83.43 pence.