The pound held near the day's highs on Tuesday after the British economy created jobs at its strongest rate in nearly a year in the three months to November, potentially undermining the case for a Bank of England interest rate cut next week.
Expectations of a rate cut have been steadily building in recent weeks thanks to dovish comments from central bank policymakers and a raft of weak data but the latest jobs figures undermined some of those bets, prompting investors to wait for January manufacturing survey figures due on Friday.
The pound rose nearly half a percent to $1.3083, up from around $1.3010 before the data was released. Against the euro, sterling also added 0.4% to 84.94 pence.
It trimmed some of those gains in late afternoon trading but held near the day's highs. Tuesday's reading showed the number of people in employment rose by 208,000 to 32.90 million, the biggest increase since the three months to January 2019 and much stronger than the median forecast in a Reuters poll for a rise of 110,000.
Excluding bonuses, which smooth out some volatility, the data also showed that pay growth slowed a touch to 3.4% annually in November, the slowest since the three months to April 2019. Economists had expected regular pay to grow by 3.4%, although with low inflation earnings are rising in real terms. "Although lagged, today's jobs print helped in reducing bets for BOE easing in the near future," Scotiabank strategists said in a note.
Money market expectations for a 25-basis-point rate cut fell slightly to around 62%, from around two-thirds earlier in the day. Three BoE policymakers have recently said that more stimulus might be needed including a cut to rates to boost a flagging economy, although many analysts say policymakers could hold off if data shows an economic rebound in December following the general election.
Purchasing Managers Index surveys on Friday will provide a clue as to whether that rebound occurred. "Risk reward is not in favour of chasing GBP lower into a rate cut: With the BoE rate cut priced with a 66% chance, the risk reward is that they delay their decision until later this year to evaluate how the data and fiscal stimulus plays out. GBP/USD would naturally head higher as a result," Nomura analyst Jordan Rochester said.
Nomura advises a long position on the pound via a two-month option though some analysts think the pound looks on shaky ground, however. "Sterling remains vulnerable in the short term, given positioning," Kit Juckes, an analyst at Societe Generale, said, referring to the net long position speculators have built up in the pound this year.
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