Sterling softer after UK labour market data

While progress in ending the government shutdown in the US contributed to a rally in equity markets yesterday, the response in both bond and currency markets was muted. In FX, the main currency pairs were confined to narrow ranges, ending little changed from Friday’s closing levels. Sterling is a touch weaker this morning on the back of slightly weaker than expected labour market data in the UK – which add to the case for a Bank of England rate cut next month – trading back above £0.88 against the euro and at around $1.3130 against the dollar. EURUSD is hovering just north of $1.1550 at the start of play today.

Equity markets rebounded yesterday with the prospective end of the US government shutdown providing the excuse to rally after last week’s sell-off. The Nasdaq in the US led the way higher (having also led on the way down last week), gaining almost 2.5%, while European stocks added almost 2%. There’s positive follow-through this morning as well with European indices up another 0.5% at the open. In fixed income, UK government bonds are outperforming this morning on the back of the labour market data with yields 5-6bps lower.

The unemployment rate in the UK edged up further in Q3 according to this morning’s labour market report, reaching 5% for the first time since early 2021 and bringing the increase since the end of 2024 to more than half a percentage point. In tandem with the increasing slack in the labour market, private sector wage growth – a key metric for the Bank of England in its assessment of the inflation outlook – moderated further in the third quarter, falling to 4.2% from 4.8% in Q2, and in the month of September alone was running at 3.8%, a five-year low. The data overall support the case for a rate cut at next month’s Bank of England meeting.

Ahead of next month’s Fed meeting, the differing views on interest rates remain stark. In remarks yesterday, the head of the Federal Reserve Bank of St. Louis noted that “it is very important that we tread with caution (on interest rates), because I believe there’s limited room for further reductions without monetary policy becoming overly accommodative.” In contrast, Governor Miran (Trump’s recent appointee and admittedly an ‘outlier’) said the Fed should cut by 50bps next month (and at least by 25bps).

It is quiet for the rest of the day in terms of economic data, with the ZEW investor confidence index for Germany/Euro area and the small business optimism index in the US the only releases of note. There are a few centra bank members due on the wires over the course of the day.