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By: Fiona Cincotta, Senior Market Analyst
With UK job vacancies at a five-year low and wage growth slowing, the UK labor market is losing the momentum that once supported higher interest rates. A weakening UK labor market weakens the case for aggressive Bank of England tightening, even as headline UK inflation has climbed to 3.1% and the Bank of England expects it to rise further. Meanwhile, the U.S. economy remains resilient, with strong job growth and sticky inflation. The result is a widening policy gap between the Federal Reserve and the Bank of England that leaves sterling exposed against the U.S. dollar.
Fiona Cincotta, StoneX Senior Market Analyst, has spent more than 15 years trading and analyzing UK, European and U.S. markets, combining fundamental and technical analysis. Based in London, she covers forex, equities, commodities and crypto assets with a particular focus on UK and European market themes.
The UK labor market is losing momentum just as headline UK inflation climbs to 3.1%, giving the Bank of England two very different signals to read. Beneath that headline number, underlying UK price pressures remain relatively contained, and the jobs data points the other way. "Vacancies in the UK," Cincotta says, "have fallen to a five-year low and wage growth is slowing." As a result, a cooling UK labor market leaves less pressure building beneath the headline inflation figure, which makes aggressive tightening harder to justify.
The Bank of England's case for aggressive tightening is weakening as the UK labor market cools. According to Cincotta, the Bank of England is "facing a difficult choice, keeping rates higher to fight inflation or to avoid tightening aggressively as that weakens growth". In contrast, the U.S. labor market is still generating strong job growth and U.S. inflation remains sticky, keeping the Federal Reserve on a firmer path. "This widening Fed-BoE policy gap is currently one of the strongest arguments for a stronger U.S. dollar and a weaker pound," she says.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Fiona Cincotta, StoneX Senior Market Analyst
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The Federal Reserve has returned to hiking with unanimous support, and its minutes show a majority backing another move before year-end. Markets now price high odds of a further Federal Reserve rate hike, and that shift is lifting U.S. Treasury yields and the U.S. dollar.
With no Fed forward guidance to lean on, rates markets are building their view of the Federal Reserve one data release at a time. A weak payrolls report and a cooler inflation print show how quickly that approach can move rate hike odds, and how fragile the bond market reaction can be.
The UK labor market is cooling, with vacancies at a five-year low and wage growth slowing, even as headline UK inflation climbs. That split weakens the case for Bank of England tightening and widens the policy gap with a resilient U.S. economy.
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