UK Employment Impact on GBP

Jarratt Davis

Special Consultant to the FPA
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UK Employment release (today 9:30 GMT) has the potential to cause volatility in the pound especially if all three UK employment parameters - claimant count, average earning and jobless rate - come in with deviations in the same direction. The important figure is average earnings. Positive deviations will see strength in pound however this may be short-lived due to the overarching issue of inflation. Conversely, a negative deviation will likely see GBP fall throughout the session. After the miss on core CPI on Tuesday, the bias is to the downside for the pound.

Description:

The headline number measures the change in the number of people claiming unemployment benefits during the previous month. The way the UK Office for National Statistics measures employment data is different from most other countries; rather than showing how many jobs were gained, the release shows the change in unemployment. A negative figure means that people left unemployment, presumably to join the workforce. The lower the figure (higher absolute number in the negative), the better for the UK economy.

The unemployment rate measures the percentage of total work force that is unemployed and actively seeking employment during the past 3 months. The International Labor Organization's measure of unemployment, excludes jobseekers that did any work during the month and covers those people who are looking for work and are available for work. The ILO unemployment rate is the number of people who are ILO unemployed as a proportion of the resident economically active population of the area concerned.

Average Weekly Earnings is expressed as a 3-month average compared to the same period a year prior, and shows the percentage change in average wages. This represents wage inflation. The unemployment rate measures the percentage of total work force that is unemployed and actively seeking employment during the previous month. Although it's generally viewed as a lagging indicator, the number of unemployed people is an important signal of overall economic health because consumer spending is highly correlated with labour market conditions. The combination of importance and earliness means this data has the potential to cause large market moves. Job creation is an important leading indicator of consumer spending, which accounts for a majority of overall economic activity.

Summary:

The pound has been under pressure in recent months as the BOE concede that inflation is persistently too low to allow consideration of rate liftoff in the medium term. To add to this, wage growth has been moving lower, from a healthy 3.3% in May 2015 to recent new lows of 2.0%. The decline in wage growth suggests to the Bank that low inflation may be around for longer, as wage inflation can often indicate the start of consumer price inflation. Average Earnings for December is expected at 1.9% and this will be the lowest since April 2015.

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