UK job losses weigh on economy as wages offer fleeting support for Pound

The UK experienced another round of job losses in June, but a surprising uptick in wages lent temporary strength to the Pound against other major currencies. Figures from the Office for National Statistics (ONS) revealed that unemployment rose once again, while average earnings climbed by 5.0% in May, just above the 4.9% anticipated by economists. This slight outperformance offered a boost to the Pound, nudging the Pound to Euro rate up to 1.1536 and the Pound to Dollar to 1.3402.

Wage growth continues to add inflationary pressure to the economy, which could discourage the Bank of England from rushing to lower interest rates. With global investors attuned to shifts in relative interest rates, the UK’s elevated wage figures provide some short-term relief for Sterling. Still, this is likely to be temporary. While earnings remain high, the broader labour market tells a more troubling story.

The jobless rate rose to 4.7% in the three months to May, its highest since September 2021, highlighting an erosion in labour market conditions even as pay packets swell. The ONS also reported a drop of 41,000 in payroll jobs during June, marking the eighth straight monthly fall in employment.

Further signs of weakness came from a continued slide in job vacancies, which fell by 7,000 to 904,000 in the three months to June. This was the 14th consecutive quarterly decline, although the pace of decline appears to be slowing.

Although the latest wage data supported Sterling on the day, it is unlikely to shift market sentiment in any meaningful way. Investors will want to see a broader recovery in economic fundamentals before reassessing the outlook for the currency.

Wider indicators point to more cause for concern. GDP figures released last week showed the economy contracting for a second consecutive month, while inflation data from Wednesday revealed a worrying acceleration in price growth. Together, these signs suggest the UK may be entering a period of stagflation, where high inflation persists alongside stagnant or shrinking economic activity — a difficult backdrop for both policymakers and market participants.

The Pound is likely to struggle in such conditions, with gains seen as short-lived and vulnerable to reversal. Further weighing on the outlook, the Institute of Directors reported that more UK business leaders expect to cut jobs over the next 12 months than to hire, indicating that the labour market could face additional strain in the months ahead.

Euro climbs after wild trading session sparked by Fed speculation

The euro experienced a turbulent trading day yesterday, whipsawed by sharp movements in the US dollar. Initially falling to a three-week low, the single currency later staged an impressive recovery, rallying nearly 1% within the same session.

The market's volatility was driven in part by headlines questioning the future of Jerome Powell’s tenure as Chair of the US Federal Reserve. Reports speculating that his position might be under threat briefly pushed the euro back into the $1.17 range. However, those gains were partially reversed after President Trump publicly denied any intention to dismiss Powell.

Although the fears proved short-lived, the incident underscored the unpredictability of the current US administration, which in turn helped the euro regain its footing as a preferred safe-haven alternative. By the end of the day, the euro had edged higher by 0.3%.

The euro also made significant strides against the pound, touching a three-month high. This was largely due to political concerns in Washington, which overshadowed supportive UK data. A stronger-than-expected UK inflation report earlier in the day had briefly bolstered Sterling, challenging the Bank of England’s current cautious stance. However, euro demand remained dominant, pushing the currency higher across the board.

Dollar knocked as markets weigh mixed inflation signals and economic strength

A more composed set of US producer price data painted a restrained inflation picture yesterday. On the surface, the figures appeared straightforward: both headline and core Producer Price Index (PPI) readings were flat in June compared to May, prompting an initial dip in bond yields across maturities. This, in turn, led traders to slightly increase expectations of a Federal Reserve rate cut in September.

However, a deeper dive into the goods segment of the report — the part most directly exposed to tariffs — revealed something less tranquil. Prices excluding food and energy climbed 0.3% after a 0.1% increase the previous month, pointing to some underlying upward pressure.

At the same time, a string of upbeat economic data helped fuel investor confidence. Industrial production picked up pace and large US banks posted robust earnings, helping to lift the S&P 500 close to its all-time high. Together, these indicators suggest the US economy is handling trade-related disruptions more capably than some had feared.

As markets worked through the full implications of the data, the US dollar came under broad pressure, falling sharply against other major currencies. The combination of subdued headline inflation and stronger economic signals appears to have muddied the outlook for monetary policy, making it harder for investors to draw a clear conclusion.

Looking ahead, the dollar faces a delicate balancing act. Factors supporting the currency include stronger-than-expected macroeconomic performance, a potential return to more hawkish rate pricing, and reduced concern over the impact of tariffs. On the opposing side, uncertainties remain. Questions around the Federal Reserve’s independence, especially in light of speculation about a more compliant successor to Chair Jerome Powell, could weigh on sentiment and limit the dollar’s strength in the near term.