The Pound's Dramatic Slide Against Key Currencies Ignites Feverish Speculation About the Bank of England's Next Move! Imagine waking up to a currency market where the British Pound is losing ground not just broadly, but in a way that screams potential shifts in monetary policy. That's exactly what unfolded yesterday, setting the stage for deeper dives into economic data and central bank decisions. But here's where it gets controversial—did the latest employment figures truly warrant such a bold reaction, or is this just the markets overreacting to whispers of rate cuts?
Let's unpack this step by step, starting with the bigger picture. The Pound's underperformance was largely confined to its performance against the core Group of Ten (G10) currencies, which include major players like the US Dollar, Euro, and others. This was fueled by a broader 'risk-off' sentiment in the markets, where investors pull back from higher-risk assets. As a result, high-beta currencies—those that tend to swing more wildly with market moods, such as the Norwegian Krone (NOK) and Australian Dollar (AUD)—took a bigger hit. However, the Euro against the Pound (EUR/GBP) saw its biggest one-day jump since September 16th, as traders began betting on the Bank of England (BoE) potentially easing monetary policy sooner than anticipated. This move wasn't random; it reflected growing optimism, or perhaps anxiety, about interest rate reductions.
Adding fuel to the fire, the 2-year UK government bond yield, known as the Gilt yield, dipped by 5 basis points (bps) yesterday. (For beginners, basis points are just a way to measure small changes in percentages—5 bps is 0.05%.) This drop pushed the odds of a BoE rate cut before year's end from a mere 20% probability to a whopping 40% over just the last three trading days. It's a significant shift that could reshape borrowing costs for everything from mortgages to business loans. But here's the part most people miss—did yesterday's employment data really justify this rapid change in market expectations?
We'd argue that one key reason for this shift is the relatively low pricing in for a December rate cut. Think about it: Markets aren't betting heavily enough on a move in the final month of the year, especially considering the gap between the November and December Monetary Policy Committee (MPC) meetings. For newcomers to this world, the MPC is the BoE's decision-making body that votes on interest rates and other policies to keep inflation in check. Between those two meetings, we'll get a flood of data: two jobs reports and two Consumer Price Index (CPI) releases, which track inflation trends. There's also the UK Budget on November 26th, which is expected to reveal efforts to plug an estimated £30 billion fiscal shortfall. This could mean tighter government spending or higher taxes, acting as a drag on economic growth. With so many data points in play, it's easy to see how expectations could swing dramatically based on what these reports show.
Now, zooming in on the jobs data itself, it did include elements that align with lower yields and potential rate easing, but overall, the picture was mixed. In fact, the scale of the market's reaction came as something of a surprise—even to seasoned observers. Bond market enthusiasts (often called 'bulls' because they bet on rising prices) zeroed in on the slowdown in private sector wage growth, excluding bonuses. This key metric fell to 4.4% on a three-month annualized basis, dipping below the BoE's Q3 estimate of 4.6%. To illustrate, annualized wage growth measures how wages are rising year-over-year, and a drop suggests cooling inflationary pressures. Our own analysis showed that three-month annualized wage growth slowed to 3.6%, edging closer to the BoE's target sweet spot of around 3.0% for wage rates that support stable prices. Meanwhile, the one-month year-over-year rate dipped to 4.2%, the weakest since December 2021. This could be a sign that wage pressures are easing, potentially giving the BoE more room to cut rates without sparking inflation. However, there's a note of caution: Public sector wage growth jumped sharply, with the one-month year-over-year rate soaring from 5.4% to 6.7%, hitting its highest level since March 2024. This divergence might complicate things, as it suggests not all parts of the labor market are cooling uniformly.
Digging deeper into the employment figures, the PAYE (Pay As You Earn) data hinted that the impact of the National Insurance Contributions (NICs) increase—think of NICs as a tax on wages for social security—might be fading, helping stabilize the labor market. Employment dipped by 10,000 in September, but the August figures were revised upward by 18,000 to a positive 10,000. Based on historical patterns, it's likely September's data will also get a positive revision soon. Unemployment ticked up a slight 0.1 percentage point to 4.8%, but how much the MPC will trust this at face value is debatable—data revisions and seasonal factors can sometimes distort the picture. And this is the part most people miss: Was there selective cherry-picking of the data to push a narrative of easing?
In our view, while some aspects of the jobs report were highlighted selectively to support a dovish outlook (that's MPC-speak for favoring rate cuts), we agree with the general direction of the market's move. There's real potential for the BoE to cut rates as early as December. Reinforcing this, MPC member Alan Taylor—known as a dove who sided with Swati Dhingra to cut rates in September—delivered comments that sounded more confident about the need for further monetary easing. His speech touched on trade diversion, concluding that significant shifts in trade patterns, like China's exports to the UK surging 12.2% year-over-year in September (while exports to the US plummeted 27%), could substantially influence UK prices. Taylor and Dhingra are currently the only doves on the MPC, but if October and November inflation data continue to cool and wages stay subdued, the case for a rate cut will only strengthen. We stick to our forecast of a gradual rise in EUR/GBP toward year-end as positioning for a BoE cut builds. For those interested in trading, our FX Weekly publication has a long EUR/GBP view that's worth checking out.
To wrap up on the data front, the three-month and six-month annualized whole economy regular pay figures continue their decline, nearing pre-COVID levels—a trend that underscores ongoing disinflationary forces in the labor market.
Source: Bureau of Labor Statistics & Macrobond
What do you think—should the BoE prioritize these data points and cut rates sooner, or is there a risk of overcorrecting and sparking other economic issues? Do you agree with the market's swift reaction, or does this feel like cherry-picking at its finest? Share your thoughts in the comments below—we'd love to hear differing viewpoints!
