UK job market shows signs of cooling

The UK CPI will peak at over 15% in the first quarter of 2023, compared to an earlier forecast of over 12%. UK inflation is expected to accelerate further in the coming months unless the government takes new steps to lower prices, reaffirming the risk of longer-lasting domestic inflation. At the same time, Citi raised its expectations for the Bank of England to raise interest rates, expecting the Bank of England to raise interest rates by 125 basis points to 3.00% by the end of this year, from an earlier expectation of another 50 basis points during the year.

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The pound strengthened after the Bank of England's hawkish interest rate hike, and the euro against the pound was under pressure, and the euro against the pound is expected to fall back to 0.8350. Overnight index swaps show the market has priced in the BoE policy rate for March 2023 from 2.72% at the end of July to around 3.40% yesterday. On this basis, the UK's inflation rate increased by 10.1% year-on-year in July, exceeding expectations and hitting a 40-year high. Any further rise in gas prices could take EUR/GBP all the way back to 0.8350. The US as a natural gas exporter does not face these challenges, so GBP/USD is forecast to remain below 1.20.

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Official data showed more signs of cooling in Britain's super-hot job market, with companies more cautious about hiring and a record drop in workers' base wages adjusted for soaring inflation. In the three months to June, Britain's unemployment rate stood at 3.8 percent, as expected in a Reuters poll, near its lowest level in half a century. The Bank of England is closely watching labor market data for signs of cooling inflationary pressures, but analysts said the mixed data was unlikely to have an impact on policy decisions next month.

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British energy group Centrica's natural gas storage facility Rough resumed operations in June. According to the latest news, the gas storage facility will start filling as early as September. This means that the only obstacle to reopening the base is an agreement between Centrica and the government, which requires the support of the state and the final agreement of the North Sea Transition Authority. Downing Street officials and Centrica are aiming to conclude talks in time for the company to start supplying Rough with fuel within the next two weeks. This reflects the growing urgency to secure supplies this winter against the backdrop of European energy shocks such as a drought in Norway, the outage of nuclear power plants in France and Russia's curbs on gas deliveries to Germany.

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Inflation in the UK hit double digits, with the annual figure in July surpassing expectations by more than 10%. While this may allow the Bank of England to continue to tighten monetary policy, it is also a sign of deteriorating consumer conditions. The cost of living crisis has already weighed heavily on UK households, and this will only add to the rise in energy prices. Sterling was a bit volatile after the data, rising from $1.2120 to $1.2140 before falling back quickly. While this is evidence of further rate hikes by the BoE, given that the market is well-prepared for the BoE's move in the next few months, I don't think a rate hike will do much good. Conversely, if an alarming rise in inflation overwhelms consumer activity, I could see this negatively impacting GBP.

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The UK salary increase has remained at 4% for four consecutive months, the highest level since 1992; in the three months to the end of July, the average salary increase reached by UK employers and employees was 4%, the same as the rate since 1992. Maximum wages rose, but further lagged inflation. The agreed median wage hike remained unchanged for the fourth straight month, even as inflation rose to a 40-year high of 9.4% in June and the Bank of England expects it to exceed 13% in October. Real compensation, excluding bonuses, fell by the most in the April-June period since official records began in 2001.