The British pound extended its losses into a third day on Wednesday, erasing around half of its gains made since the start of the month. Stronger-than-expected jobs data out earlier today failed to halt the pound’s decline, which has dipped back below 1.41 dollars for the first time in two weeks.
The latest labour market report out of the UK showed that the unemployment rate was unchanged at 5.1% in the three months to January. However, the number of people out of work declined by 28,000 from the previous three months. There was also a decline in the number of people claiming jobless benefits, which fell by a bigger-than-expected 18,000 in February. As a result, the claimant count rate of unemployment fell 0.1% to 2.1% last month. Total employment in the economy continued to grow, rising by 31.42 million to give a rate of 74.1% for the three months to January.
There was also good news on the earnings front as average weekly earnings growth showed signs of picking up following unexpected weakness in the final three months of 2015. Total average weekly earnings rose by 2.1% year-on-year in the three months to January, beating estimates of 2% and higher than the 1.9% rate of the previous month. Excluding bonuses, earnings growth also quickened, rising by 2.2% versus forecasts of 2.1% and a rate of 2% in the prior month.
Weak wage growth has been one of the main reasons why the Bank of England has pushed back the timing of when it expects to raise interest rates. The combination of muted earnings growth and declining energy prices have eroded inflationary threats to the British economy in the near term. Today’s better-than-expected figures would normally have boosted the pound as it strengthens the case for a rate rise sooner rather than later, but uncertainty over the outcome of the UK’s referendum on EU membership hangs over market sentiment for sterling.
A new poll based on voters’ intentions in the UK’s Daily Telegraph on Tuesday gave the ‘leave’ campaign a 7% lead over those wishing for the UK to remain in the EU. The latest poll has added renewed pressure on the pound, which had posted a 4% recovery from the February 29 low of 1.3835 dollars to reclaim the 1.44 handle last Friday.
Also attracting markets’ attention today is the UK Government’s latest budget for 2016/17. In the budget statement, the Chancellor of the Exchequer, George Osborne, cut the growth forecasts for the UK economy for the duration of the parliament. Growth for 2016 was cut to 2% from 2.4% and for 2017, it was cut to 2.2% from 2.5%. The downgraded revisions further dented the pound today, sending it lower against its major peers. Sterling dropped below 160 versus the yen while the euro rose to a 2-week high of 0.7885 pounds.
Despite the revised growth forecasts, the Chancellor still expects for public finances to post a surplus by 2019/20. In other measures announced in the budget statement, there were some tax sweeteners such as a cut in the corporation tax rate to 17%, an increase in the threshold for the 40% income tax band, a reduction to the capital gains tax and tax cuts for Scotland’s North Sea oil industry. There were also new rail and road projects announced for the North of England as well as plans to convert all schools in England to academies.
However, tax increases were not totally absent as the Chancellor announced a surprise ‘sugar tax’ on soft drinks, which is expected to raise £520 million to be used for schools sports funding. There was also an increase of 0.5% in the insurance premium tax and fresh spending cuts of £3.5 billion.
London stocks appeared more impressed with the budget than the pound as the FTSE 100 index gained 0.5% after the budget statement.
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