**UK Employment and Wage Growth Slow, While US Retail Sales Highlight Dollar Strength**
*By Kenny Fisher, MarketPulse*
The global foreign exchange market opened to significant data from both sides of the Atlantic, positioning the British pound and US dollar at the center of attention. Tuesday saw the release of key labor figures from the UK, as well as crucial retail sales numbers out of the US, offering strong signals on potential next moves for policymakers at the Bank of England and the Federal Reserve.
## UK Labour Market Loses Momentum
The Office for National Statistics (ONS) delivered a mixed batch of data on the state of the UK labor market. The headline unemployment rate in the UK ticked higher, and wage growth, while still substantial, continued to decelerate from previous highs. This report comes at a critical juncture, with the Bank of England weighing up the right time to begin cutting rates after a burdensome period of inflation-fighting monetary policy.
### Key Data Points from the UK Report
– **Unemployment Rate**: The 3-month unemployment rate rose to 4.4 percent for the period ending April, up from 4.3 percent previously.
– **Employment Change**: The economy lost 139,000 jobs from the previous quarter, more than the expected contraction of 100,000 positions.
– **Average Earnings (excluding bonuses)**: Wages grew at an annual rate of 6 percent, down from 6.1 percent previously, and in line with market forecasts.
– **Average Earnings (including bonuses)**: Earnings were up 5.9 percent, falling from 6 percent in the previous reading.
The slowdown in wage growth reinforces views that inflationary pressures from the labor market are fading, which will be cautiously welcomed by policymakers at the Bank of England.
### Market Implications
Sterling responded by ticking lower, as investors recalibrated their expectations for the first interest rate cut by the BoE. The data increases the likelihood that a rate cut could come as early as August, as the cooling labor market diminishes a key source of inflation persistence.
– **The Bank of England is expected to leave the bank rate unchanged at 5.25 percent at its June meeting, but the probability of an August cut is now climbing.**
– **Forward rates markets are now pricing about a 60 percent chance of a quarter-point cut by August, with another potential cut before year’s end.**
Gilt yields also eased on the release, as traders bet on an earlier start to monetary easing compared to the Federal Reserve. The differential between expectations for the BoE and the Fed has played a major role in cable’s recent performance.
### Political Context
The labor report arrives less than a month before the UK’s July 4 general election. The opposition Labour Party, which remains on track for a major parliamentary victory according to polling, seized on the jobs figures as evidence that the Conservative government has presided over a weak economic recovery.
– **Leaders in the Labour Party highlighted stagnant wage growth and the rise in unemployment as signs of a faltering economy.**
– **The Conservative government has countered with claims that inflation is being brought under control, and that a steady hand is needed to cement the recovery.**
The interplay between economic data and political rhetoric may continue to add volatility to FX markets, as traders position for both monetary and political outcomes.
## US Retail Sales Beat Expectations, Bolstering the Dollar
Across the Atlantic, the focus switched to American consumer strength, with the Commerce Department’s May retail sales figures surprising to the upside.
### US Retail Sales Data – May
– **Headline Retail Sales**: Rose by 0.1 percent month-on-month, beating expectations of a flat reading.
– **Core Retail Sales (excluding autos, gasoline, building materials and food services)**: Rose by a robust 0.4 percent month-on-month, also surpassing forecasts.
The snapback in retail sales followed April’s flat
Read more on GBP/USD trading.