Pound Sterling Today: UK Jobless Rate Drops, But Warning Signs Grow

The Pound Sterling was little changed against the euro and US dollar as a drop in UK unemployment failed to convince markets of genuine labour market strength.

UK Unemployment Drops to 4.9%, but the Headline Rate is not as Good as it Seems

The UK unemployment rate dropped from 5.2% to 4.9%.

While this was a positive surprise, it had little effect on the pound as the drop was driven mostly by inactivity rather than new hiring.

Odds for a BoE hike this year still reflect high uncertainty.

Markets are relatively calm on Tuesday following a volatile open to the week in reaction to the closure of the Strait of Hormuz over the weekend. Stocks are slightly higher, oil is flat and the US dollar is making modest gains. The 2-week ceasefire is due to expire on Wednesday so it may be a brief pause in the wild action.

Data picked up slightly on Tuesday with retail sales out in the US showing strong growth of 1.9%, up from last month’s 0.7% and beating 1.4% estimates. Over in the UK, employment data appeared to paint an improving picture for the labour market and the UK economy, especially after last week’s strong GDP data. However, the data may not be as positive as it first appears.

UK Unemployment Drops to 4.9%

The headlines from the April 21st UK employment report are a major surprise. Consensus estimates were that the jobless rate would remain steady at 5.2%, but the ONS reported that the UK unemployment rate fell to 4.9% in the three months to February. This marks the first time the rate has dipped below 5% since last summer, suggesting that the economy entered the recent period of Middle East instability with a much higher degree of resilience than previously thought. However, as with most of the data from the start of the year, we need to acknowledge that this “headline” improvement comes with significant caveats.

Specifically, the fall in unemployment was not primarily driven by a surge in new hiring, but rather by a notable rise in economic inactivity. The inactivity rate increased to 21%, as roughly 95,000 more people—led largely by students—left the labor force entirely. This indicates that the decline in the jobless rate is partially a result of people giving up on their job searches rather than finding work. Furthermore, vacancies fell for the 21st consecutive time to 711,000, their lowest level since 2021, which confirms that employer caution is now structurally embedded.

Usually, positive economic surprises would lift the pound, especially since the BoE is 50/50 on whether to hike in response to higher inflation. However, Sterling was largely unmoved, with EURGBP falling just 0.1% and trading at 0.87. As ING noted,

“The UK unemployment rate, which dropped from 5.2% to 4.9%, appears to be driven by a spike in ‘economic inactivity’ as opposed to a rise in employment. And more importantly, it is likely to rise again as the energy crisis takes its toll on Britain’s jobs market. That’s why we don’t currently expect the Bank of England to hike rates this year”

Work Secretary Pat McFadden noted that the figures showed an improvement with “unemployment falling below 5%,” but warned that “we cannot escape the effects of the war in the Middle East”. Similarly, Derrick Dunne, CEO of YOU Asset Management, remarked that the data makes for “uncomfortable reading” because while the jobless rate fell, real wages continue to struggle against the inflationary pressure of the recent energy surge. Sanjay Raja, chief UK economist at Deutsche Bank, added a further note of caution, stating that “underneath the hood, signs of weakness continue”.

Ultimately, today’s report buys the Bank of England time but does not offer a clear “green light” for policy tightening or easing. While a 4.9% unemployment rate is a positive headline, the decline in payrolled employees by 11,000 in March suggests the impact of the naval blockade and energy crisis is only just beginning to feed through to the real economy. For investors, the focus now shifts to Wednesday’s inflation data, which will determine if this surprise labor market strength is a sign of a “firm footing” or merely a lagging indicator of an economy about to face its toughest challenge yet.