UK Inflation Data Tomorrow: Euro Pound Buyers To Step In?

The UK jobs data released today paints a mixed picture, highlighting the complex dynamics in the labor market. On the surface, the drop in the unemployment rate to 4.0% in August might signal strength. However, according to ING,  deeper analysis reveals a cooling jobs market, especially when examining more timely payroll data and vacancy trends. 

The claimant count fell by 27.9k, and the employment change rose by an impressive 373k, exceeding expectations, which initially seems like robust growth. Average weekly earnings also increased, with a 3M/YY change of 3.8% and a 4.9% rise in ex-bonus earnings. While these numbers may concern hawks worried about wage-driven inflation, private sector wage growth has already shown signs of moderating, albeit slightly.

However, the reality behind these figures is more nuanced according to ING. Vacancies are falling, and when you exclude government-related employment, the labor market looks closer to its 2019 state, which had slower wage growth at around 3.5%, rather than the current 5% levels. This suggests that the jobs market is normalizing post-COVID but hasn’t yet filtered through to wage moderation at the pace many, including the Bank of England, might hope.

So, the Bank of England faces a tough challenge ahead. The Federal Reserve in the US has already indicated that the jobs market is no longer seen as a significant driver of inflation. In the UK, however, wage growth remains a problem, with private sector wages still up 4.9% year-on-year. Despite that, the payroll data shows that the UK labor market has cooled significantly this year. This disparity between headline data and on-the-ground realities is creating uncertainty for policymakers.

Governor Andrew Bailey recently mentioned that the Bank of England could become “a bit more activist” if inflation data supports it. With September CPI data expected this week, markets will closely watch for a possible decline in services inflation to around 5.2%, a move that could give the BoE the room to cut rates. The current outlook suggests that if wage pressures begin to ease, rate cuts may follow sooner than anticipated, with many expecting cuts as early as November or December. However, Pill stressed the need for patience offsetting the dovish impact of Bailey’s initial comments. 

Looking ahead, with the UK CPI report  still to come this week, there’s growing anticipation that these factors will further shape expectations around the Bank of England’s easing cycle. If inflation falls as forecasted, the pound could face renewed pressure, especially if the BoE becomes more dovish. As a result, EUR/GBP could find support around 0.8350 and may retest the recent highs of 0.8500. However, there are risks that GBP doves get disappointed again.