UK labour market suffers Brexit bite

The pound may have cleared the 1.25 hurdle on the back of the UK labour market report for February and March, but aside from the stronger wage growth the labour market data had some worrying pockets of weakness, which may suggest that the triggering of Article 50 is starting to have some economic effect.

Jobless claims: largest increase since 2011

The chief concerns are the rise in jobless claims, which surged by 25.5k in March – the month that the UK government triggered Article 50. This was the largest monthly increase in claims since 2011. Although one month’s data does not make a trend, it does suggest that we could have reached peak employment in the UK, and as we progress through 2-years of Brexit negotiations, we may see labour market weakness ahead.

Although the unemployment rate remained steady at 4.7%, the lowest level since 1975, If we see further increases in jobless claims then we could see the unemployment start to creep higher over the summer. Although employment levels are at record high in the UK, we are also seeing jobs growth start to slow. 39,000 jobs were created in the UK in the three months to February, although job creation can be quite erratic, we would expect job growth to continue to slow this year as Brexit uncertainty weighs heavily on business sentiment and investment.

Why the UK consumer may still expect a squeeze

The chart below shows the spread between UK wage growth and UK CPI, which fell to 0% in February. This means that for the first time since 2014 there hasn’t been a squeeze on the consumer (as you can see in the chart below). But, the good news might end there. If our hypothesis is correct, and the rise in jobless claims could be a signal for weaker labour market data ahead, then we would expect wage growth to slow in the coming months, which could be pound negative. Although GBP/USD jumped on the back of today’s labour market data, the gains may not be sustainable.

The impact on sterling

Overall, we think that this month’s labour market data isn’t enough to significantly boost the pound. The Feb/ March UK jobs report is showing some signs that Brexit is starting to hit the labour market. If this continues then we believe it will be pound negative, but we need a few more months’ of rising jobless claims to prove that our hypothesis is correct. In the interim the pound is being driven by broader market forces, namely rising levels of risk aversion. GBP/JPY spiked on the labour market data but is now backing off highs, and this pair remains 1% lower on the week, suggesting that the pound could be vulnerable if markets go into full-blown panic mode over Russia/ US and North Korea fears.

Chart 1:

Source: City Index and Bloomberg

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

The products and services available to you at FOREX.com will depend on your location and on which of its regulated entities holds your account.

FOREX.com is a trading name of GAIN Global Markets Inc. which is authorized and regulated by the Cayman Islands Monetary Authority under the Securities Investment Business Law of the Cayman Islands (as revised) with License number 25033.

FOREX.com may, from time to time, offer payment processing services with respect to card deposits through StoneX Financial Ltd, Moor House First Floor, 120 London Wall, London, EC2Y 5ET.

GAIN Global Markets Inc. has its principal place of business at 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA., and is a wholly-owned subsidiary of StoneX Group Inc.