GBP hit by further evidence of weakening UK labour market

USD/CHF: US government shutdown set to end & tariff relief for Switzerland

The improvement in global investor risk sentiment at the start of this week has helped the high beta commodity currencies of the Australian dollar, Norwegian krone and New Zealand dollar to outperform while the yen has given back some of last week’s gains. The improvement in global investor risk sentiment reflects both initial optimism that the US government shutdown is finally close to an end, and that last week’s sell-off for US AI/tech stocks has lost momentum. The Nasdaq composite index has rebounded sharply by almost 4.5% from the low point recorded on Friday. Bloomberg has reported overnight that the US government shutdown is on a path to end as soon as tomorrow after the Senate voted 60-40 yesterday to pass a temporary funding bill. The Republican-controlled House must still approve the bill which would keep most of the government open through to 30^th January. The House is expected to vote on the bill tomorrow and if approved would then go to President Trump to sign off. With the shutdown close to coming an end, market participants and the Fed will now be eagerly awaiting the release of delayed economic data to better assess the health of the US economy. The record shutdown will have dampened economic growth in Q4. The US dollar has benefitted recently from the lack of US data after that the Fed indicated that they had become more cautious over cutting rates further in December without evidence showing the labour market had weakened further heading into year end. With the shutdown ending soon, we now expect the Fed to have sufficient evidence to stick to their plans to cut rates again next month supporting our forecast for the US dollar to weaken in the coming months.

In contrast to the yen which has weakened at the start of this week, the other low yielding G10 currency of the Swiss franc has held up better. The Swiss franc has been supported by reports yesterday that Switzerland is close to securing a trade deal with the US. The deal would lower the tariff rate applied to imports from Switzerland to 15% from the current elevated rate of 39% which was set in August. It would bring the tariff rate in line with the 15% rate applied to imports from the EU. A development that would help to dampen downside risks to growth in Switzerland. The SNB has acknowledged that the outlook for Switzerland’s economy has deteriorated due to significantly higher US tariffs. Lowering the tariff rate would also ease immediate pressure on the SNB to lower rates further. The SNB has reiterated recently that there is still a high hurdle for a return to negative rates. The Bloomberg report stated that the trade deal may be concluded within the next two weeks according to people familiar with the matter, but warned that nothing is finalized and the talks could still come undone. President Trump has confirmed that they are “working on a deal to get their tariffs a little bit lower”.     

WEAK LABOUR DEMAND & SLOWING WAGE GROWTH IN UK

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Weak labour market data supports December BoE rate cut

The pound has weakened at the start of the European trading session resulting in EUR/GBP rising back above the 0.8800-level. The main driver was the release of the latest UK labour market report this morning revealing further evidence that the UK labour market remains weak. The report revealed that the number of payrolled employees fell more than expected by 32k in October. It came on top of an upward revision to job losses in September of -32k. The data suggests that the downturn in the labour market is getting worse ahead of the Autumn Statement. At the same time, the unemployment rate rose up to a fresh cyclical high of 5.0% indicating that there is growing slack in the labour market. Loosening labour market conditions should give the BoE more confidence that wage growth will continue to slow dampening upside inflation risks. Private earnings growth excluding volatile bonus payments slowed to 4.2% 3M/ YoY in September and has fallen from just over 6% at the end of last year.             

The weak labour market report supports our forecast for the BoE to cut rates next month. As we saw at last week’s MPC meeting, it was already a close call to leave rates on hold last week with key swing voter Governor Bailey indicating that he wanted to see more evidence that softer inflation would be sustained heading into year end. The scale of weakness in today’s labour market report could be sufficient on its own to tip his vote in favour of a rate cut next month unless there is a significant upside inflation surprise in the CPI reports for October and November.       

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com