UK jobs data lifts BoE rate hike bets, inflation data next

Pound rises after strong data

The UK jobs market has proved to be resilient as the government’s furlough scheme came to an end, easing some concerns at the BoE and boosting the pound.

The number of employees on staff payroll rose by 160,000 in October, taking the total number of staff on payrolls to 29.3 million, above pre-pandemic levels. Furthermore, the number of people claiming unemployment benefit also fell by 14.9k.

The UK unemployment rate also ticked lower to 4.3% in the three months to September its lowest level since July 2020. Meanwhile UK average weekly earnings were 5.8% higher compared to the three months to September a year earlier.

The data suggests that the jobs market has so far comfortably absorbed those released from the furlough scheme as it expired on September 20^th.

BoE governor Andrew Bailey had highlighted uncertainties over the labour market and how it will perform as the furlough scheme came to an end as a motive to not hike interest rates last month.

The question is now whether one months’ worth of data is sufficient to calm nerves at the BoE for a rate hike at the December meeting. The fact that GBP has strengthened reflects the greater probability of a rate increase.

Whilst the BoE emphasized jobs as a key and a healthy labor market as a condition for hiking interest rates, that is only part of the story.

Inflation set to rise higher

UK inflation data is due tomorrow. Expectations are for CPI to rise to 3.9% YoY in October, a big jump up from 3.1% in September. Meanwhile core inflation is expected to rise to 3.1% in October, up from 2.9%.

The BoE expect inflation to continue rising to wards 5% by the end of the year. Andrew Bailey also commented that he is uncomfortable with the inflation at current levels.

So, with the labour market showing resilience and inflation expected to surge higher could the BoE be gearing up for a December rate hike.

This is in sharp contrast to the ECB. Only yesterday ECB President Christine Lagarde pushed back on the chances of a rate hike next year. The central bank divergence could keep EUR/GBP heading lower.

Where next for GBP/EUR?

EURGBP faced rejection at the 200 sma at 0.8590 and is extending its move lower taking testing support at 0.8450. A breakthrough here brings 0.8400 round number and October low. A breach of this level could be key, opening the door towards 0.8280 the February 2020 low.

Onn the flip side, 0.8515 the 50 sma could offer some resistance. Any meaningful recovery would need to retake the 200 sma and falling trendline at 0.8575.

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