UK unemployment falls to 6.5%, but markets focus on

More good news from the UK: the unemployment rate dropped from 6.6% to 6.5% in May, the lowest since 2008. Also the Claimant Count Change (jobless claims) figure for June beat expectations with a drop of 36.3K, more than 27.1K expected. Last month’s drop of 27.4K was now revised to a drop of 32.8K. All these numbers point an even better improvement in the UK job market.

But despite the addition of jobs, the wages remain low, and this limited the pound.

The average earnings index rose by only 0.3%, less than 0.5% expected. With  a slow rise in salaries, we can expect a low rise in inflation and no rush for the Bank of England to raise interest rates. This comes in contrast to yesterday’s  surprisingly strong  inflation numbers that eventually sent the pound to new multi-year highs.

So, the immediate reaction was a drop GBP/USD to  1.7110 from around 1.7140. While cable has since recovered (after all, the report isn’t that bad), it will struggle to move higher against the US dollar due to this lack of conviction.

The problem of low wages is also seen across the Atlantic: despite strong job gains, wage gains remain slow.

Later in the day, we have the second day of Fed Chair Janet Yellen’s testimony.

Here is how Pound/Dollar looks like after the data:

For more about the pound, see the GBPUSD forecast.