The UK’s ILO unemployment rate eased to 4.9% in the three months to April from 5.0%, according to the Office for National Statistics, undershooting the 5.0% consensus. Claimant Count Change rose by 31.2K in May; that compared with a revised 8.3K increase in April and an expected 25.8K gain. Employment Change slowed to 100K in April from 148K in March, yet remained above the 80K forecast.
Wage growth held firm. Average Earnings excluding bonus rose 3.4% year-on-year in the three months to April, unchanged from the prior reading and above the 3.2% estimate, while Average Earnings including bonus increased 4.4% after a revised 4.4% previously, beating the 4.0% forecast. Sterling edged up after the release, with GBP/USD 0.14% higher on the day at 1.3310; technically, the pair stayed below its 20-period simple moving average and 100-day moving average, with the Relative Strength Index (14) near 40. Key levels cited were support at 1.3305 and resistance at 1.3408, 1.3455 and 1.3513.
Labour Market Trends and BoE Policy Outlook
We are seeing a familiar pattern in the UK labour market, reminiscent of past reports where strong wage growth drove currency movements. The most recent ONS data from this week shows the unemployment rate is now at a lower 4.2%. However, wage growth including bonuses remains elevated at 5.1%, which keeps pressure on the Bank of England.
This persistent wage inflation is the key metric we are watching, as it complicates the BoE’s path forward. While the claimant count did rise by 15.5K last month, the strong wage numbers make it unlikely the BoE will consider cutting interest rates soon. We believe this reduces the chance of significant monetary easing in the near term.
GBP/USD Trading Strategy and Market Outlook
Given the conflicting signals of a slightly softening jobs market against high wage inflation, we see an opportunity in options on GBP/USD. The BoE’s data-dependent stance could lead to sideways price action followed by a sharp move on the next major data release. We are considering buying straddles to profit from a potential spike in volatility, regardless of the direction.
Currently, GBP/USD is trading near 1.2750, a very different technical landscape than the 1.3310 level seen in the historical data. The pair has been finding support around the 1.2700 mark, but upside momentum is weak. We will be watching for a break below this level as a signal to purchase put options, targeting a move towards 1.2600.
Our main focus for the coming weeks will be the next Consumer Price Index (CPI) release. A surprisingly low inflation number could rapidly change market expectations for BoE policy and trigger a sharp rally in the pound. Therefore, we are hedging our short-term bearish bias with out-of-the-money call options as a precaution.
