Pound rose as the UK labor market demonstrated resilience with an unexpected drop in the unemployment rate. However, it intensified inflationary pressures, causing concerns for the Bank of England.
The report from the Office for National Statistics (ONS) said the unemployment rate dropped to 3.8% in the three months leading up to April, instead of increasing to 4%. Meanwhile, the average household income growth surged to the highest level observed before the pandemic.
These data led to a sharp increase in pound as traders reassessed their stance on the Bank of England's interest rates. The market now anticipates a rate hike of at least 120 basis points, which will result in a rate exceeding 5.7% by February 2024, the highest level since October.
The figures also came as a big surprise since economists and the Bank of England expected the labor market to weaken after 12 consecutive interest rate hikes. However, the employment sector remains highly overheated, not to mention that wage growth poses an even bigger issue than before, as rising income could trigger another surge in inflation.
This strengthens the idea that the Bank of England will continue raising rates both in June and August, especially since the number of employed individuals grew to a record 33 million for the quarter, surpassing the pre-pandemic level for the first time, as UK companies make every effort to find the necessary workforce by increasing wages and reducing the unemployment rate.
Meanwhile, wages, growing slower than inflation, erode consumers' purchasing power, causing the most significant decline in living standards in generations. Although Chancellor of the Exchequer Jeremy Hunt promised to tackle the issue, progress has been limited, with real wages adjusted for inflation remaining 1.3% lower than a year ago.
According to the report, wage growth in April saw a 9.7% increase in the minimum wage, aimed at protecting the lowest-paid workers from spikes in food and energy prices. Overall, regular pay growth excluding bonuses accelerated to 7.2%, while wages in the private sector increased by 7.6%, also reaching a record high.
In terms of the forex market, GBP/USD remains bullish and could continue to grow if buyers gain control above 1.2560. Only a breakdown of this level will trigger a rise towards 1.2600, heading to the level of 1.2640. In the event of a decline in the pair, sellers will attempt to regain control around 1.2520, which could lead to a fall to 1.2480 and 1.2450
EUR/USD could grow further if buyers get ahold of 1.0768 and surpass 1.0800. This will allow a move towards 1.0830, heading in the direction of 1.0875. In the case of a decline around 1.0765, euro will fall to 1.0730 and 1.0700.