UK Sterling Strengthens Amid Slowing Labour Market and Potential BoE Rate Cuts


  • The pound shows strength against the US dollar and the euro following the recent data published by the Office for National Statistics.
  • The UK economy might have experienced a minor recession in the latter half of 2023, but a tight labor market is still evident.
  • Despite 19 consecutive falls in job vacancies, pressure on pay growth and inflation remains a key concern for the Bank of England.
  • Jobless rate fell to 3.8% between October and December 2023, while employment rose by 72,000 people.
  • A slight cool down in the UK jobs market is anticipated in the coming months.

Strength of Sterling and BoE Rate Cuts Expectations

Sterling recently advanced against the U.S. dollar and the euro following the Office for National Statistics’ data release. This development led investors to reduce their expectations for BoE rate cuts in 2024.

Salary Growth and Economic Recession

Excluding bonuses, wage growth registered at 6.2% in the last quarter of 2023 compared to the same quarter the year prior. Meanwhile, official data projected to confirm on Thursday suggests the UK economy might have slipped into a minor recession in the latter half of 2023. The labour market, however, remains tight with businesses continuing to face challenges in finding and retaining employees.

UK Labour Market Developments

Jake Finney, a PwC UK economist, indicated that the labour market was cooling down following the latest drop in job vacancies despite continued pay growth. Although job vacancies fell for the 19th consecutive time in the three months to January, they remained only 2,000 lower than in the previous three months.

Inflation and BoE Concerns

Finney indicated that the Bank of England’s primary concern would be whether the labour market has cooled down sufficiently to attain a sustainable 2% inflation target. The BoE is closely monitoring pay growth as well as inflation pressure in the economy.

Private Sector Pay and Inflation

Private sector regular pay increased by 6.2% annually in the fourth quarter, surpassing BoE’s 6.0% prediction. There is concern that if pay rises too quickly, it may affect the inflation’s rate of fall to its 2% target.

Labour Market Cooling

“Hugh Gimber, a global market strategist at J.P. Morgan Asset Management, suggests the Bank might need further evidence of a cooling labour market before considering cutting rates. The recent jobless rate drop to 3.8% and an employment increase of 72,000 are notable indicators in the economy.

UK Job Market and Future Outlook

A moderate slowdown in the UK’s job market is anticipated according to various signs. For instance, the pace of pay raises is expected to decline over the next year, the first such drop in nearly four years. Meanwhile, adjusted regular earnings experienced a significant increase, the largest since three months to September 2021.

PIP Penguin