The number of people in work in the UK rose to a record in January, which suggests that the UK labour market is close to full capacity, according to the Office for National Statistics. However, the pound actually fell on the news, not because the labour market data isn’t encouraging, but because wage growth was disappointing.

BOE gets it right, for once…

The Bank of England mentioned in its Inflation Report earlier this month that the labour market could probably improve further without putting upward pressure on wages, and that is exactly what today’s data suggests, after wage growth slipped back at the end of last year from 2.8% to 2.6%.

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The markets are focusing on wage data as it will be a key driver of monetary policy this year. If wage growth rises sharply then central banks should hike interest rates at a faster clip than currently expected. However, today’s weaker wage data could take the pressure off the BOE, hence the decline in UK bond yields this morning, which has also weighed on the pound.

Brexit could see wage growth fall further

The key takeaway from this data is that employment can continue to increase, but at this stage it is not putting upward pressure on wage growth. Interestingly, the Bank of England agents’ report expects wage growth to slow further this year to 2.2%. The UK’s Brexit negotiations will be worth watching: if we see an exodus of highly paid bankers and workers from the financial sector, then wage growth could continue to moderate in the coming years, even if wage pressures build elsewhere, such as in the construction sector.

Not looking good for the pound

Thus, there is still a lot of uncertainty about the outlook for the UK labour market, which means that a measured market response to today’s good news is warranted. Today’s wage data miss adds to the downward pressure building on the pound. As we mentioned yesterday, the spread between the UK and US 10-year bond yield continues to slide, it is back at its lowest level since the start of the year when GBP/USD was trading between 1.2250-1.2300, thus yield analysis suggests that there could be further GBP/USD downside to come.


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