The British pound has seen better demand this morning following the latest set of labor market data released today. The unemployment rate in the UK was seen falling back to 4.3% in the three months to September, marking a decline from the prior 4.5% reading and an improvement on the 4.4% market forecast.

Additionally, average earnings also beat expectations, coming in at 5.8% versus the market forecast of 5.5%. Finally, the claimant count (amount of people claiming unemployment benefits) fell back to -14,900 from the prior reading of -51,000, marking an improvement on the expected -39,200 reading.

Economic Recovery Progressing

In all, this was a solid set of data for the UK and reflected the ongoing recovery in the economy. The unemployment rate in particular, is now sitting at its lowest level since Q4 2017. With inflation rising and the labor market continuing to tighten, the case for Bank of England (BoE) rate hikes might seem apparent.

However, the market was recently left confounded when the BoE refrained from lifting rates in November, following a period of seemingly clear guidance that it was likely to do so.

However, in explaining the decision, BoE governor Andrew Bailey noted that the end of the government’s furlough support scheme in October meant that job losses were likely to increase, despite the broader economic recovery.

Indeed, with inflation rising and many UK citizens losing government support, the BoE judged that this was not the right time to lift borrowing costs for UK households.

Q4 In Focus

The key is to see how the economy performs over Q4 following the loss of the government’s furlough scheme. Given the pent-up demand for labor, there is a good chance that job losses will not be as high as previously expected. If this is the case, and inflation continues to rise, then we are likely to see a BoE rate hike by February at the latest.

Market pricing for a December rate hike has now increased on the back of today’s data, with the CME BoE Watch showing an almost 70% chance of a hike in December. With this in mind, GBP is likely to remain well bid in the near term provided there is no material increase in COVID numbers, raising the risks of renewed lockdowns.

On this note, we heard from the UK Prime Minister this week that a Christmas lockdown could not be ruled out in a worst-case scenario, so there are still risks to consider on the horizon.