Sterling suffers as wages fall again
June 15th: Highlights
- Prices growing faster than earnings
- MPC facing tough decisions
- Fed hikes but what now
Employment Report confirms Economic woes
Yesterday’s U.K. jobs report showed that the unemployment rate was unchanged at 4.6%. This data has long been the subject of questions as the Government tinkers with what is and isn’t included. However, it is the earning section provides the most interest. With inflation seen rising to 2.9% earlier in the week, average earnings grew at just 2.1% leading to the largest fall in real wages since 2014.
The MPC, which meets today, appears powerless to arrest the situation. Rising inflation in a slowing economy is an early sign of stagflation. Higher prices and higher unemployment is the “nightmare scenario” for Central Bankers. It is impossible to hike rates to curb inflation as it risks choking off growth. As the economy slows, unemployment rises.
Sterling rose against a weaker dollar but is struggling just below a seven-month low versus the Euro. 0.8850 continues to be strong resistance for the common currency. The pound is currently trading at 1. 2750 and 0.8800.
Carney’s caution proved right
Today he will face Kristen Forbes across the table for the last time. The one constant voice calling for a rate hike leaves the MPC at the end of the month to return to the U.S. and academia.
Taking a more pragmatic view of the economy in that there is no precedent on which to base a judgement has been proven correct. To paraphrase the proverb, “we live in interesting times”.
The ECB faces similar problems in that there has never been a situation where a single body has been tasked with providing monetary policy for nineteen diverse economies each deciding their own fiscal requirements.
Rate hike overshadowed by data
At the start of the year, as the Fed switched to a “tightening bias”, three hikes for the entire year was the base case. Now there is a risk to the Central Bank’s credibility as the core rate of inflation is just 1.7%, the fourth month in a row in which the rate of increase has fallen and its lowest since in two years.
There is an underlying view that the rate hikes are a tool to slow the growth of the stock market. The DJI is making new highs constantly as investors look for returns.
The Euro almost reached 1.1300 making a high of 1.1296 before falling back on profit taking. The dollar index continues to be in the doldrums unable to make any progress above 97.50.
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”