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Paltry wage growth weighs on the pound

Updated -  May 14, 2014 4:50:00 AM By Kathleen Brooks



The market is getting used to better than expected economic news out of the UK, which may be one reason why the pound sold off even though the UK’s unemployment rate for March fell to its lowest level since early 2009.

The good news

This morning’s labour market data showed a 25.1k fall in the number of people claiming jobless benefits, a 0.1% drop in the unemployment rate, a 283k increase in the number of people in employment between January to March, and an extra 722k people in employment in the last 12 months, which is the fastest rate since records began. There was even good news in the bad news: the number of unemployed has fallen by 309k in the last 12 months.

Wages: the weakest link

The most disappointing part of the report was wages; average weekly wage growth was 1.7%, disappointing expectations of 2.1%. If you exclude bonuses, wages actually slipped in March to 1.3% from 1.4% in February.  Although headline wage growth is still above CPI (1.6%), the fact that wages made no headway in March suggests that the recent increase was a flash in the pan, and not the sign of a sustained trend.

This slip in wage growth is significant as we wait for the BOE’s Inflation Report later today. The Bank has said that it will look at a broad range of measures of job growth, including wage levels, thus the fall in wages excluding bonuses, could negate some of the good news on the job creation front.

What it means for Carney:

Although economic growth and job creation are strong, the Bank of England may choose to focus instead on the weak wage growth, as the Bank’s only mandate is to maintain a 2% inflation target. With price growth a mere 1.6%, and wage growth disappointingly weak, the BOE may argue that it has to keep rates low for a prolonged period to ward off deflation fears. Depending on how the BOE reacts in its inflation report today, this could have big implications for the pound and UK rate expectations.

The outlook for the pound:

The pound fell on the back of the labour market report, and GBPUSD has made fresh lows of the day, it is now trading at its lowest level since 29th April. It is testing 1.6820 support right now, which has been resistance in the past. We need to hold this level on a closing basis to maintain a bullish bias in the short term. A daily close below here opens the way to further downside including the 50-day sma at 1.6724.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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