UK Labour Market Data in Focus: Sterling Faces Key Tests
Article published on February 17th, 2025 9:00AM UK Time
The upcoming UK labour market report for the three months to December is expected to show a modest uptick in unemployment to 4.5% from 4.4%, alongside an increase in ex-bonus earnings growth to 5.8% from 5.6%. This follows the previous release, where the unemployment rate edged up to 4.4% from 4.3%, employment growth slowed, and wage growth remained resilient.
Data Reliability Concerns Persist
Despite the anticipated figures, concerns remain over the reliability of the Labour Force Survey (LFS) due to low response rates. Analysts at Investec highlight the potential shortcomings of the LFS data, suggesting that HMRC’s PAYE payroll data offers a more accurate gauge of employment trends, as it avoids sampling errors and potential bias. According to PAYE figures, the UK job market exhibited a flat-to-lower trend in H2 2024, aligning with stagnant GDP growth.
On the wage growth front, Investec anticipates a further rise in earnings, with a potential headline print of 6.3%—matching the Bank of England’s latest forecast. However, given ongoing data quality issues, the report’s influence on BoE rate expectations may be somewhat limited. That said, any upside surprise in wage growth could reinforce the case for a gradualist approach to rate cuts, with markets tempering expectations of aggressive easing.
FX Market Implications: GBP/USD Faces Key Resistance
GBP/USD faces key resistance at 1.2700/1.2750, an area where upside momentum could fade. Beyond the US foreign policy backdrop, the focus for GBP this week will be on:
- Labour market data (Tuesday)
- UK CPI report (Wednesday)
- Bank of England Governor Andrew Bailey’s speech (Wednesday morning)
Of particular interest is the BoE’s stance on employment. Former hawk Catherine Mann has emphasized the ‘non-linear’ nature of UK employment adjustments, suggesting that labour market shifts could influence the BoE’s reaction function more than expected.This suggests that UK employment could remain stronger than expected for longer, before declining suddenly once economic pressures (such as weak demand or high interest rates) reach a critical level.
This has major implications for monetary policy:
- If the BoE waits for clear signs of job market deterioration before cutting rates, it risks reacting too late, as the downturn could accelerate rapidly.
With the UK economy showing signs of stagnation and wage growth remaining in focus, markets will closely watch for signals on how quickly the BoE is prepared to ease policy—with sterling highly sensitive to any shifts in expectations.