UK Unemployment Rate Preview: Persistent labor shortages likely to keep low levels

• Jobs report for the United Kingdom could significantly impact the BoE rates outlook.
• The Unemployment Rate in the UK is likely to hold steady at 3.8% in the quarter to May.
• Office for National Statistics is set to publish the UK labor market report at 06:00 GMT.

The Office for National Statistics is scheduled to publish the United Kingdom’s jobs data this Tuesday, which is expected to show a decline in the country’s Unemployment Rate in the three months to May.  

The UK labor market remains very tight notwithstanding the pressure of 13 consecutive interest rate increases by the Bank of England (BoE) since late 2021 to tame inflation. In the quarter through April, ILO Unemployment Rate fell to 3.8% from the 3.9% recorded in the previous period, beating the market consensus of a 4.0% print.

Meanwhile, the number of people claiming jobless benefits dropped by 13.6K in May, compared with the expected decrease of 9.6K. The Claimant Count Change unexpectedly jumped by 23.4K (an upward revision from 46.7K) in April.

The UK’s Average Weekly Earnings, excluding bonuses, surged 7.2% 3Mo/YoY in April versus 6.8% prior. The gauge including bonuses rose 6.5% 3Mo/YoY in the fourth month of the year as against a 6.1% increase seen in March. It’s worth noting that the April data included the impact of a 9.7% rise in the minimum wage.

The real concern remains the persistent shortage of workers, which is driving up wage inflation. The number of people unemployed fell by 25,000 in the quarter through April compared with the three months through March. The BOE is concerned that the slack in the growth of workers will continue stoking inflationary pressures, through a wage-price spiral, keeping it on track to deliver more rate hikes.

What to expect in the next UK jobs report?

The UK ILO Unemployment Rate is seen steady at 3.8% in the three months through May while the economy is seen adding 150K jobs in the reported period, down from a 250K jobs growth seen previously.

The UK Average Weekly Earnings (excluding bonuses) are expected to increase 7.1% YoY through May, at a slightly slower pace than  April’s 7.2% 3Mo/YoY rise. However, Average Earnings, including bonuses, are seen rising 6.8% in the reported period, up from a 6.5% growth reported through April, hitting the highest level since August 2021. 

On Monday, a survey conducted by the Recruitment and Employment Confederation (REC) and accountants KPMG showed that increases in starting salaries for permanent and temporary staff were the weakest since April 2021, alleviating some of the BoE’s concerns about inflation pressure.

“The final labor market data before the August BoE decision should indicate whether domestic price pressures are becoming more persistent. Our expectation is for a slight loosening in the labor market and a marginal easing in regular pay, which should allow the Bank to downshift to 25bp,” analysts at Societe Generale noted.

When is the UK jobs report and how could it affect GBP/USD?

Jobs report for the United Kingdom is slated for release at 6:00 GMT on Tuesday, July 11. GBP/USD has taken out the 1.2850 key resistance after the US Dollar extended weakness on disappointing US Nonfarm Payrolls data and dovish signals from the Federal Reserve policymakers. It remains to be seen if the UK labor market report helps Pound Sterling find a fresh leg higher, which could initiate a meaningful upside toward the 1.3000 level. 

Upbeat employment numbers and hot wage inflation data would justify the BoE’s stance of more tightening ahead, bolstering market expectations of a BoE terminal rate at 6.50%. Speaking at a conference in Aix-en-Provence in France on Sunday, Bank of England Governor, Andrew Bailey, said that "we will bring inflation back to target," and that "we do have some flexibility about how quickly we bring it back to target." Despite, the central bank’s forecasts of a significant slowdown in inflation over the past months, the UK CPI rose 8.7% in May, outpacing estimates of an 8.4% increase. The inflation rate in the country is over four times the BoE’s 2.0% target.

Conversely, the British Pound could see a sharp correction on signs of loosening UK labor market conditions, which could pour cold water on the hawkish BoE outlook. In such a scenario, GBP/USD could pull back toward 1.2700.

Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the GBP/USD pair and explains: “The currency pair is challenging the highest level in 15 months near 1.2875 heading into the UK jobs data release. The gradual ascent in the 14-day Relative Strength Index (RSI) above the midline justifies the GBP/USD advance.”

Dhwani also outlines important technical levels to trade the GBP/USD pair: “On the upside, Pound Sterling buyers now look to recapture the 1.2900 mark, above which the 1.3000 psychological barrier will be tested. Conversely, immediate support awaits at the bullish 21-Daily Moving Average (DMA) at 1.2738, below which sellers will prod the static support near 1.2680. The deeper correction will then expose the 1.2600 round figure.“