UK unemployment rate unexpectedly falls, but major concerns resurface

UK Jobs, GBP/USD News and Analysis

• Britain’s unemployment rate unexpectedly falls, but it’s not all good news
• GBP gets a boost on the back of the jobs report
• UK inflation data and first look at Q2 GDP to follow

Britain’s unemployment rate unexpectedly falls, but it’s not all good news

In reality, UK jobs data appeared to show resilience as the unemployment rate eased significantly from 4.4% to 4.2%, despite expectations of a rise to 4.5%. Tight monetary policy has affected employment intentions in the UK, leading to a gradual rise in the unemployment rate.

Average earnings continued to decline, despite the fact that the ex-bonus data point fell much more slowly than anticipated, 5.4% versus the 4.6% expected. However, the number of claimants for July raised a few eyebrows. May saw the first unusually high number as those filing for unemployment benefits rose to 51,900, when previous numbers had been consistently below 10,000. In July, the number rose again to 135,000.

In June, employment rose by 97,000, beating conservative expectations for a weak increase of 3,000.

Change in employment in the UK (Latest data point is for June)

Source: Refinitiv, LSEG prepared by Richard Snow

The number of people claiming unemployment benefits in July rose to levels seen during the global financial crisis (GFC). Therefore, sterling’s short-term strength may prove to be short-lived when the dust settles. However, there is a strong likelihood that the pound will continue to rise as we look ahead to tomorrow’s CPI data, which is expected to rise to 2.3%.

Source: Refinitiv Datastream, prepared by Richard Snow

Sterling gets a boost on the back of the jobs report

Sterling rose on encouraging unemployment statistics. A tighter-than-first-expected labor market may have the effect of reigniting inflation concerns, as the Bank of England (BoE) forecasts that the price level will rise again after reaching its 2% target in May.

GBP/USD 5 minute chart

Source: TradingView, prepared by Richard Snow

The cable pullback received a boost from the jobs report this morning, seeing GBP/USD test a notable confluence level. The pair immediately tests the 1.2800 level, which kept bullish price action at bay earlier in the year. In addition, the price action is also testing the long-term trendline support, which is now acting as resistance.

Tomorrow’s CPI data could see another bullish advance if inflation rises to 2.3% as anticipated, with a rising surprise likely to add further impetus to the bullish pullback.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

Keep an eye on Thursday’s GDP data in light of renewed pessimism about a global slowdown after US jobs data took a hit in July, leading some to wonder if the Fed maintained restrictive monetary policy for too long.

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX