Sterling drops against Euro and USD after disappointing employment figures

Sterling dropped against the Euro and Dollar in the aftermath of the UK's latest employment figures, which showed job losses and rising unemployment. However, losses are expected to be limited by still-high wage increases and the anticipated importance of next week's inflation report.

The Pound to Euro exchange rate fell as low as 1.1810 shortly after the ONS reported that the UK unemployment rate rose to 4.4% in April, surprising the market, which had expected the rate to remain unchanged at 4.3%.

This occurred as the UK reported 140,000 job losses in the three months to April and an increase in jobless claims to 50,400 in May, up from 8,400 previously. The Pound to Dollar exchange rate dropped to 1.2716, down from 1.2739 prior to the data release.

However, losses in the Pound will be limited by still-strong UK wage rates, which will keep inflation elevated. This suggests that the Bank of England won't be able to cut rates as quickly or as soon as markets had anticipated just a month ago.

Average earnings, including bonuses, rose by 5.9% in April, outpacing the consensus expectation of 5.7%. When excluding bonuses, pay increased by 6.0%, aligning with estimates.

If the unemployment rate continues to rise in the coming months, the pressure on wages will likely diminish, potentially leading to lower domestic core inflation rates. This scenario would provide the Bank of England with greater confidence when considering interest rate cuts.

Although some members of the MPC are inclined to cut rates now, most will prefer to see clear evidence of an economic downturn first. They find little justification in adopting the ECB's strategy of cutting rates and then waiting for months before implementing another cut.

Attention will now shift to next week's UK inflation release and the Bank of England decision, which are the headline events for the Pound in June.

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