The British pound has previously attracted some interest from world markets if supported by positive job growth. This is even though there has been a drop in pace of increase in wages. Despite the opportunities, the UK’s labour market also possesses threats to the future of the currency.
As Statistics by the Office for National Statistics (ONS) indicate, a substantial number of new jobs were created in the UK between May and July –267, 000 – even higher than what had been projected 115, 000. This is the highest level of job growth achieved in a period of 18 months. The jobless rate remained constant at 4.1 percent, which indicates a robust labor market. At the same time, however, the labor cost dynamics demonstrated a wage increase trend of 5.1 percent, the lowest since last year June, excluding bonuses.
BoE Faces Rate Dilemma
Some tricky options now wait Bank of England (BoE) policy board prior to an upcoming policy meeting scheduled for next week. On the one hand, you may cut the rate, but strong employment is likely to rule this out in the near future. Employment has moderated wage growth which may persuade the dovish members of the MPC to suggest cuts in the rates sooner than later. Some analysts say that rate cuts could occur as early as November.
Taking into account the employment report, the pound appreciated by over 25 pips against the dollar. Still, caution is prevailing among market traders who are still conscious of the possible political risks and any economic news that is likely to influence the course of the currency in the weeks to come.
The political environment as a standpoint of the pound remains a currency volatility factor. Towards this end, a critical parliamentary vote on the proposal to abolish the universal Winter Fuel Payment for the elderly could test the patience of the Labour party and their leader Keir Starmer. Especially if it is true that 30 to 50 Labour MPs could choose to abstain on this issue which points to disunity just before the Labour Party conference on September 22.
If such concerns increase regarding Starmer with growing market fears of him losing the grip, it would in turn affect the sentiments in the markets. This is why political violence or volatility in governance is regarded as an ill wind for British pound currency depreciation, for investors do not like such turmoil.
Thus, recollections of past trends and predictions of evolving events tell that the pound is going to remain volatile. Focus on the policy outlook is likely still to dominate thoughts and seeking opportunities in how it might change or the volatility it may bring is certainly welcome.
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