Labour market strong enough to absorb furlough wind down
The UK saw 241,000 new staff added to payrolls in August, amid a record surge in hiring. The number of workers on UK payrolls is now back to its pre-pandemic level. Meanwhile vacancies are also at a record high rising 35% to 1 million as firms battle staff shortages owing to Brexit & Pingdom.
Meanwhile the claimant count fell by 58.6k, slightly below the 71k forecast.
Even so, the data suggests that the UK labour market remained buoyant even as covid cases picked up across the summer months. With the government’s furlough scheme due to start winding up at the end of the month, the data suggests that the labour market may well be able to absorb many of the 1.6 million workers still on furlough.
The other side of the puzzle is inflation. UK CPI data is due to be released tomorrow. Expectations are for CPI to jump to 2.9% YoY in August after falling to 2% in July. Core CPI is also expected to surge to 2.9%, up from 1.8%.
Rising wages amid worker shortages but mainly massive supply chain disruption caused by both the pandemic and Brexit have driven up prices. Whilst inflation did ease slightly last month this is likely to be a blip rather than the start of a new trend. The BoE expects inflation to reach 4% by the end of the year.
BoE’s next move?
Strength in the labour market and rising inflation could allow the BoE to consider raising interest rates in the first half of next year. This would be ahead of the US Federal Reserve, boosting demand for the Pound relative to the USD.
This weeks’ data drop comes following the most hawkish comments yet from BoE Governor Andrew Bailey, who said last week that he considered that the minimum conditions had been met for the central bank to hike interest rates. He also added that the MPC is equally split between those who consider that minimum conditions have been met and those who don’t consider the economy recovery is strong enough. The next BoE meeting is 23rd September. Should BoE policy makers sound increasingly hawkish the Pound could look to retake 1.40.
Don’t forget the USD!
As with any currency pair, there are two sides to it. GBP bulls are currently very dependent on USD weakness. US CPI inflation ids due later today, a strong read could prompt further speculation of a sooner move by the Fed, which would lift the USD, particularly following recent hawkish Fed speakers.
Where next for GBP/USD?
GBP/USD trades within a holding pattern since the start of the month, capped on the upside by 1.3890 and on the lower side by 1.3730. The pair trades above the 50 sma and below the 100sma. The RSI suggests that there could be more upside to be had.
Buyers might wait for a move above 1.3890 in order to target 1.40 round number and 1.4025 the late July high. Sellers might look for a move below 1.3720 to target 1.36 the August low.