The pound fell and UK bonds rallied as traders added to bets on interest-rate cuts from the Bank of England after data showed a sharp deterioration in the labor market.
Sterling fell as much as 0.7% to $1.3456 on Tuesday, heading for its worst day in a month and leading losses among Group-of-10 currencies. Gilts outperformed euro-area peers, with yields down five to six basis points across the curve.
UK employment plunged by the most in five years and wage growth slowed more than forecast, data released on Tuesday showed. That increased traders’ conviction that the BOE will deliver two more quarter-point rate cuts this year.
“The UK labour market does seem to be weakening at the margin,” said Mike Riddell, a portfolio manager at Fidelity International, who has a small long position in gilts up to the 10-year maturity and a moderate short position in the pound. If the weakening continues at this pace, the BOE will “resort to quarterly cuts,” he added.
The BOE has already lowered borrowing costs twice this year, bringing the benchmark to 4.25%. Money markets are now fully pricing another reduction in September and see a 90% chance of anoter move by December, up from about 60% on Monday.
Gilt yields fell six to seven basis points across the curve. The two-year rate — the most sensitive to monetary policy chances — dropped seven basis points to 3.94%, the lowest in a month.
Expectations of lower interest rates and falling bond yields reduced the appeal of the pound, which hit its lowest level against the euro in nearly three weeks. That marks its strongest reaction to a UK payrolls report since September.
Still, sterling is one of the highest yielding G-10 currencies and has been bolstered by an uptick in risk sentiment and demand for carry trades. The currency last week touched its strongest level since February 2022.
“The dovish repricing of BOE rate-cut expectations takes some of the shine of the pound,” said Lee Hardman, a senior currency analyst at MUFG. But it’s “unlikely on its own to reverse the recent upward trend unless the BOE signals it is more willing to speed up rate cuts.”
What Bloomberg Strategists Say…
“While both headline and private-wage growth slowed, investors need to keep in mind that numbers above 5% are patently incompatible with the idea of 2% inflation, so it’s premature to conclude that the path is clear for continued rate cuts.”
— Ven Ram, Macro Strategist, Dubai
Options markets indicate traders are increasingly divided on the pound’s near-term direction. One-week risk reversals — which reflect the difference in demand for bullish versus bearish bets — are trading near parity, signaling uncertainty after six straight days of waning upside momentum.
While the softer employment data may help ease concerns among BOE policymakers that pay rises are fueling inflation, consumer price growth remains sticky at 3.5%, above the target.
The data “puts the BOE in an exceptionally challenging situation,” said Zara Nokes, global market analyst at JP Morgan Asset Management. The labor market is “clearly deteriorating” but inflation is still-elevated and that could keep the BOE “firmly on hold” until there’s more evidence of cooling inflation.
The pound’s slide helped boost UK stocks, with the export-heavy FTSE 100 index set to close at a record high. About 75% of revenue for the gauge’s companies comes from abroad.
With assistance from Sujata Rao.
This article was generated from an automated news agency feed without modifications to text.
