The pound (GBP) faced sharp selling pressure against other currencies on Tuesday (10/6) after the UK Office for National Statistics (ONS) reported that the labour market contracted in the three months to April.

The data showed that the economy added 89,000 new jobs, down from the 112,000 seen in the quarter ended March. The ILO Unemployment Rate rose to 4.6%, as expected, from the previous reading of 4.5%. This is the highest unemployment rate seen since July 2021. Slower job growth in the UK reflects the impact of increased employer contributions to social security schemes.

UK Chancellor of the Exchequer Rachel Reeves raised the employer contribution to National Insurance (NI) from 13.8% to 15% in her Autumn Statement, which came into effect in April.

After releasing the labour market data, the ONS said that "some firms may not be recruiting new workers or replacing those leaving."

Meanwhile, Average Earnings, a key measure of wage growth that drives inflation in the services sector, has grown at a modest pace. Average Earnings Excluding Bonuses rose by 5.2%, slower than the 5.4% estimate and the previous reading of 5.5%, revised down from 5.6%. The measure of wage growth including bonuses grew at a slower pace of 5.3%, compared with the 5.5% expectation and the previous reading of 5.6%, revised up from 5.5%.

The slower wage growth and slowing labor demand are expected to prompt Bank of England (BoE) officials to reassess their guidance that the central bank will follow a "gradual and cautious" monetary expansion approach, which they delivered in May after cutting interest rates by 25 basis points (bps) to 4.25%.

Meanwhile, traders are betting that the BoE will keep interest rates unchanged at 4.25% at its policy meeting on June 19. However, market experts anticipate that weak labor market data has increased the likelihood of a rate cut at its policy meeting later this year. According to analysts at Dutch Bank ING, the weak employment data "helped reinforce the August and November cuts".

This week, investors should brace for more volatility in the British currency as monthly Gross Domestic Product (GDP) and factory data for April are scheduled for release on Thursday. (alg)

Source: FXstreet