GBP: Labour market softens while wage growth remains stubborn
The latest UK labour market figures show continued signs of weakness, although the downturn is less severe than earlier in the year. The disruption triggered by the £26 billion rise in payroll taxes seems to be settling. Payroll numbers declined by 10,000 in September, following a revised 10,000 increase in the previous month. The outcome was broadly in line with economists’ expectations and far less pronounced than the cuts seen during the summer.
The unemployment rate edged up to 4.8 per cent from 4.7 per cent. Regular wage growth, excluding bonuses, slowed to 4.7 per cent over the three months to August, down from 4.8 per cent previously. That is the weakest reading since late 2021 and came in below forecasts. Even so, wage pressures remain elevated compared with the Bank of England’s comfort levels. The current pace is still well above the roughly 3 per cent threshold usually regarded as compatible with the 2 per cent inflation target.
Sterling slipped by around 0.4 per cent against both the dollar and the euro following the release, as markets adjusted expectations for Bank of England policy in a slightly more dovish direction. This adjustment may not last. With wage growth and inflation still running above long-term averages, traders may soon revert to pricing a more prolonged hold.
GBP/USD has been below its 100-day moving average since late September. The decline has now developed into a more substantial retreat, with the pair approaching the 200-day moving average as the next significant support level, currently around 1.3182. For now, the pair remains stable above the 1.3250 to 1.3275 range.
USD: Dollar index climbs to 99 during data lull
The dollar index has returned to the 99 zone, supported by investor caution towards the yen and the euro following recent political disruptions. Markets are also reacting warily to the latest trade tensions between Washington and Beijing, though without the sharp swings seen in previous episodes.
While many see the US moves as another TACO trade initiative, China caught investors off guard by threatening further retaliatory measures against American restrictions on its shipping sector. The dollar’s response has been muted so far, with investors showing more resilience to trade headlines and maintaining hopes of a deal between the two largest economies. Optimism was reinforced when Scott Bessent commented yesterday that he still expects President Trump to meet his Chinese counterpart later this month at the Asia-Pacific Economic Cooperation summit in South Korea.
For now, the dollar is benefiting from a period without key economic data due to the government shutdown. Once the flow of macroeconomic releases resumes, the rally may meet resistance. Even so, the absence of data is providing useful insight into how the market responds to strong and weak reports. The Federal Reserve’s stance remains hawkish in tone but cautious in action. Despite the rate cut in September, forward guidance is still conservative, which ultimately supports the dollar.
When the shutdown ends, the dollar could emerge in a stronger position, able to absorb weaker data more easily and to rally more decisively on positive surprises. Many of the year-end rate cuts currently priced in may be reassessed in a more hawkish direction. Today, Jerome Powell is due to speak alongside Michelle Bowman and Christopher Waller, which could offer important policy signals ahead of the October meeting in this data-silent environment.
EUR: Technical support unravels as the euro slips
The break below the 100-day moving average, which had underpinned the euro’s rally against the dollar this year, has undermined the importance of the 1.16 level. This support was breached again yesterday, despite the absence of a fresh catalyst, after holding firm since July. The price action remains corrective, but the move is telling. It suggests the pair is no longer anchored to a crucial technical level and is inclined to drift lower, even without new drivers.
For a more pronounced correction to materialise, forthcoming US data will need to confirm the macroeconomic story that has been forming. Expectations still point to a resilient American economy, but the labour market is an area where surprises could swing sentiment more sharply. Combined with the Federal Reserve’s persistent hawkishness, this presents a clear positive bias for the dollar.
EUR/USD is currently drawing support from the 1.1550 to 1.1560 range in the short term, though this level has not been tested extensively in recent years. It only reappeared during the summer and early autumn. Buying interest may therefore prove fragile. The break of the 100-day moving average has also loosened the pair’s attachment to its previous upward trend structure.
