Sterling declined against both the Dollar and the Euro on Tuesday after weak UK labour market data strengthened expectations of further interest rate cuts by the Bank of England this year.
According to the Office for National Statistics, wage growth decelerated significantly, and the unemployment rate climbed to its highest level in almost four years during the three months leading up to April.
The downturn seemed to accelerate in May, with more up-to-date data from the tax office revealing a drop of 109,000 in the number of employees on company payrolls, the sharpest fall since May 2020, during the peak of the COVID-19 pandemic, Reuters news agency reports.
“The latest official read on UK labour market activity provided broad confirmation that conditions were easing,” stated Nikesh Sawjani, senior UK economist at Lloyds.
“Should the labour market continue to cool further in the coming months and quarters, consistent with the indication provided by a range of surveys, we believe that should give the Bank of England confidence to deliver further cuts in the Bank Rate over the next year or so.”
At the time of writing, the Pound was down 0.5% against the greenback at $1.3488, having previously fallen to $1.3458, the lowest since 2nd June.
The Bank of England is meeting next week and although it is forecast to stand pat on rates, money market traders have increased their expectations for further rate cuts later this year.
Short-term rate futures now reflect roughly 48 basis points of cuts by year-end, suggesting around two quarter-point reductions, up from 39 basis points prior to the data release.
“This (labour market data) puts a question mark on the hawkish bias that we’ve seen from the Bank of England,” stated Kirstine Kundby-Nielsen, FX analyst at Danske Bank.
“Markets are very firm that we won’t get a cut next week, and I think that’s definitely the case, but it can open the door when we get to the August meeting.”
Furthermore, Sterling declined around 0.4% at 84.6 pence per Euro, its lowest level against the single currency since 9th May.