The pound, in the dollar pair, reacted negatively to today's UK labor market data. At first glance that reaction looks anomalous, because many components of the release appeared in the green. But, as often happens, the devil hides in the details. The report's particulars signal worrying trends, and those trends drew traders' focus.
Thus, according to the published data, Britain's unemployment rate unexpectedly fell to 4.9% after two months at 5.2% (a five-year high). Most analysts had expected the indicator to remain at the prior month's level in February. The pay metric also printed in the green: average earnings came in at 3.8% versus a forecasted dip to 3.6%. Excluding bonuses, the indicator fell to 3.6%, while the forecast stood at 3.5%.
However, the weekly change in claims for unemployment benefits printed in the red: instead of the forecasted rise to 21.4k, claims jumped to 26.8k. The upward dynamic there marks the fifth month in a row.
As noted above, that flaw does not exhaust the release's problems. Behind the "pretty" headline numbers lurk hidden weakness in the UK labor market.
For example, although the unemployment rate fell to its lowest level since August last year, the reasons for that move are far from encouraging. The main driver was a rise in economic inactivity. The fall in the unemployment rate largely reflected people leaving the labor force. Economic inactivity rose to 21%. In other words, roughly 9 million working age people neither work nor seek employment due to illness, study, and a range of other reasons. Formally they do not count as unemployed, because the statistical machinery excludes them from that category, yet de facto they remain outside employment.
One more worrying leading indicator was payrolls (HMRC). According to March tax and customs data, the number of employees on payrolls fell by 11,000, while most experts expected a 5,000 decline. Moreover, the February result received a substantial downward revision, from +20,000 to -6,000.
Another negative signal came from cooling demand and an effective hiring freeze. The UK labor market ceased to be a recruiter's market: job vacancies fell below the 700,000 mark, the lowest level since the coronavirus crisis. We also see a persistent trend of rising redundancies, which indicates that firms are shifting from a labor shortage mindset to staff optimization. Artificial intelligence has contributed to this shift: according to recent reports from HR bodies, including CIPD, one in six UK firms expects headcount reductions in the next 12 months due to AI adoption.
The "green tint" of the pay metrics also proves deceptive. Although nominal wages remain relatively high, February recorded the slowest pace of wage growth since late 2020—remember, growth stood at just +3.8% including bonuses and +3.6% excluding bonuses. Taking into account the inflation surge driven by the energy crisis and geopolitical tensions, real household purchasing power will decline.
There is also another factor that will show up later with a negative effect. From April 1 this year, the UK raised the national living wage to £12.71 per hour for employees aged 21 and over. That decision will clearly add pressure on small businesses, which, amid weakening demand, may respond only with further cuts and a halt to hiring young workers.
Thus, today's UK labor market report does not qualify as merely mixed — it proves weak and negative in its essence. Therefore, the GBP/USD market reaction to this release looks perfectly logical and justified.
Nevertheless, market participants avoid opening large positions in GBP/USD and across major currency pairs. Geopolitics plays the role of a stop valve: the uncertainty over a second round of US-Iran talks keeps traders on hold. That uncertainty will resolve very soon: either the talks will take place and the temporary truce will be extended, or the talks will not occur, and events will follow an escalation path.
In the first case, markets will increase appetite for risk assets and, accordingly, for the pound. If the Middle East conflict flares up again, the safe-haven dollar will return to the spotlight, and GBP/USD will head toward the base of the 34 figure, especially against the backdrop of weak labor data. Which way the scales will tip, we will find out very soon.
