Brown Brothers Harriman’s (BBH) Elias Haddad notes GBP/USD has given back part of its gains as weaker United Kingdom (UK) labor market data dampens Bank of England (BoE) tightening prospects. Rising unemployment, falling payrolls and slowing private sector wage growth contrast with still-aggressive swaps pricing for BoE hikes, leaving scope for a downward repricing that could further undermine the Pound (GBP).

Labor slack weighs on BoE outlook

"GBP/USD retraced part of yesterday’s gains. Growing UK labor market slack will curb Bank of England (BOE) rate hike expectations. The unemployment rate unexpectedly rose 0.1ppt in March to 5.0% (consensus: 4.9%) and labor demand worsened as payroll employment plunged -100k in April (consensus: -10k, March: -28k), the biggest monthly drop since May 2020."

"Meanwhile, the policy-relevant private sector regular pay growth slowed to 3.0% y/y in March (consensus: 3.1%) vs. 3.2% in February. That’s the lowest pace of wage growth since October 2020 and is well below the BoE’s Q1 projection of 3.5%."

"The swaps curve continues to price in about 75bps of cumulative BoE rate hikes to 4.50% in the next twelve months. That’s too aggressive given the BoE estimates a negative output gap between -1.5% and -1.7% of potential GDP in 2026. Bottom line: scope for a downward adjustment to the UK swaps curve alongside domestic political uncertainty, can further undermine GBP. "

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)