Published: 13/06/2023 By ECAPSterling rallied this morning following the release of a UK labour report that roundly trounced analyst expectations. This suggests that the UK would continue to see elevated inflation levels as a result of elevated wage settlements. Moreover, the slate of above-consensus labour market statistics suggests the Bank of England is still some way off from cooling the economy enough to bring down inflation. The UK's June jobs report revealed the unemployment rate unexpectedly fell to 3.8% from 3.9% in March, whereas the market was in fact looking for a pick-up to 4%. The surprise was driven by a strong rise in employment of 250K in the three months to April, surpassing the 182K recorded in the three months to March and consensus expectations for a fall to 150k. Ultimately, the Bank of England will have little choice but to continue raising interest rates in this environment, for fear that inflationary expectations are becoming entrenched.
The Euro continues to draw support from rising bets for further policy tightening by the European Central Bank which is seen as a key factor keeping the shared currency afloat. ECB President Christine Lagarde indicated last week that additional interest rate rises were likely as, so far, there was no clear evidence that underlying inflation has peaked. This, along with the recent hawkish remarks by several ECB policymakers, suggests that the central bank still has room to raise borrowing costs despite a fall in headline Eurozone CPI to 6.1% in May. Looking forward, German and European ZEW Survey details for June as well as second-tier EU statistics may entertain price dynamics ahead of Thursday’s European Central Bank monetary policy meeting.
The US Dollar weakened in overnight trade, coming further off recent two-month highs as markets await more cues from today’s consumer price index inflation data as well as tomorrow’s Fed meeting. CPI data due later in the day is expected to show that US inflation grew at a slower pace in May than the prior month. However, the reading is still expected to be twice as much as the Fed’s annual target range of 2%. Moving forward, the inflation reading is widely expected to factor into the Fed’s decision on interest rates at the conclusion of tomorrow's two-day meeting. Ultimately, while the central bank is expected to hold rates steady, markets remain on edge over any potential hawkish surprises.