- EUR/GBP gains traction to near 0.8295 in Tuesday’s early Asian session.
- The UK Unemployment Rate climbed to 4.3% in three months to September.
- The ECB is on track to deliver more rate cuts.
The EUR/GBP cross gathers strength to around 0.8295 during the early European session on Tuesday. The Pound Sterling (GBP) weakens against the Euro (EUR) after the recent mixed UK labor market data. The attention will shift to the German November ZEW survey, which is due later on Tuesday.
Data released by the Office for National Statistics (ONS) on Tuesday showed that the UK ILO Unemployment Rate rose to 4.3% in the three months to September from 4.0% in the previous period. This figure came in weaker than the expectation of 4.1%. Meanwhile, the Claimant Count Change increased by 26.7K in October versus 10.1K prior (revised from 27.9), below the market consensus of 30.5K.
UK Wage inflation, as measured by Average Earnings excluding Bonus climbed 4.8% 3M YoY in September versus 4.9% in August, beating the estimation of a 4.7% rise. Average Earnings including Bonuses also rose by 4.3% in the same period, compared to 3.9% (revised from 3.8%) quarter through September. The Pound Sterling attracts some sellers in an immediate reaction to the UK employment report.
On the other hand, the European Central Bank (ECB) policymaker Robert Holzmann said on Sunday that there is no reason for the European Central Bank not to cut interest rates in December, but the decision will be based on the incoming data. The expectation that the ECB is likely to deliver more rate cuts might cap the upside for the cross in the near term. Markets have fully priced in a 25 basis points (bps) rate cut then, as well as a nearly 20% chance of a larger 50 bps move.
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.
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