After just a few months of partial recovery, the UK unemployment rate has shot up recently to 4.8%, sending the UK labor market into a panicked tailspin. Unsurprisingly, the value of the Pound Sterling has plummeted. This increase is one of the most telling signs of Britain’s labor market. Fewer new jobs would mean the economy is not just growing slower, but potentially shrinking and growing weaker.
New job creation fell sharply over the term. Just 91,000 new workers entered the labor force, a steep drop from the 232,000 jobs created on average in the three months ended in July. Job growth is trending down, and average earnings have gone from increasing to just barely keeping up with inflation. Today, the UK labor market finds itself on a deeply troubling trajectory. These figures hold great promise and implications. They could influence monetary policy decisions by the Bank of England (BoE) in the next few months.
Economic Indicators and Their Impact
The unemployment rate represents a key indicator of the overall economic wellbeing. In normal times, this would be a precursor to a decline in economic activity. This is particularly alarming for the UK, which is heavily reliant on its service sector. A significant rise in the unemployment rate would result in depressed consumer spending and lower overall economic output.
Around the same time as the unemployment rate was starting to rise, average earnings were starting to stagnate. Once excluding pseudo-wages like bonuses, average earnings including bonuses also slowed to 4.7% y/y, the lowest level this series has seen since May 2022. Average earnings, excluding bonuses, surged by a robust 5%. This surging growth is a testament to the fact that even if base wages are starting to catch up, total compensation packages remain well short of inflation and the growing cost of life.
These indicators would point to the UK’s labor market cooling. Accordingly, analysts are already forecasting more aggressive interest rate cuts by the Bank of England. According to Megan Greene, member of the BoE Monetary Policy Committee, the current high-interest rates must be reduced. Despite these new changes, she emphasized that monetary policies still seem restrictive.
Market Reactions and Technical Analysis
Following the economic data, The Pound Sterling turned bearish. The 20-day Exponential Moving Average (EMA) is falling above 1.3418, reflecting a short-term negative sentiment to the currency. Today, the 14-day Relative Strength Index (RSI) is trading under 40.00. That suggests ominous bearish momentum weighing down the Pound.
Foreign exchange market analysts are obsessively tracking levels of key support and resistance for Pound Sterling. The August 1 low of 1.3140 is the line in the sand for bulls – the key support area. If the price falls below this level, we should see additional drops. Its psychological 1.3500 level is a big psychological barrier. This would limit any possible upside in value for the Pound.
Implications for Future Policy and Economic Outlook
Given the latest labor market figures, there is significant speculation on the future direction of monetary policy from the Bank of England. If economic indicators of a slow recovery are true, then more interest rate cuts should be justified to spur economic growth. Though investors and policymakers both found August a tumultuous month, they are in the middle of determining strategies for the future based on these developments.