LONDON—The euro and sterling rose against the dollar as UK basic pay growth sped up and eurozone employment rose more than expected, underlining the resilience and tightness of the labor market across the region.
A flash estimate of employment showed the number of people with jobs in the eurozone increased by 0.4 percent quarter-on-quarter, twice as fast as expected by economists polled by Reuters, despite slowing economic growth.
In Britain, data showed the pace of growth in basic pay sped up again in the last three months of 2022 even as the labor market cooled. The pace of pay growth in Britain is being monitored closely by the Bank of England (BoE) as it gauges how much higher to raise interest rates.
“With the BoE having already signalled on numerous occasions that a tight labour market remains a threat to price stability, today’s figures will cement expectations that interest rates will be raised further at next month’s MPC meeting,” said Stuart Cole, head macro economist at Equiti Capital.
Money markets are pricing in a 80 percent chance of a quarter point percentage BoE hike in March and a 74 percent chance of a 50 basis point interest rate hike by the European Central Bank in March.
US CPI Next
The dollar index, which measures the U.S. currency against six major rivals, fell 0.18 percent to 103.03 ahead of a keenly anticipated inflation report, while the yen strengthened as surprise pick Kazuo Ueda was nominated as the Bank of Japan’s next governor.Markets are looking to U.S. consumer inflation data for further clues on the Federal Reserve’s policy outlook, with the headline number expected to have risen by an annual 6.2 percent in January according to a Reuters poll, after December’s 6.5 percent gain.
Moh Siong Sim, a currency strategist at Bank of Singapore, said the debate right now is whether inflation will be stuck at 3 percent to 4 percent or move lower to 2 percent in line with the market’s earlier hopes, Sim said.
“The odds are shifting to a more reasonable assessment that we might possibly get stuck at 3–4 percent and the Fed will have to do more.”
The U.S. central bank earlier this month raised interest rates by 25 bps, and said that it was turning the corner in its fight against inflation.
New BOJ Governor
Elsewhere, Japan’s government named academic Kazuo Ueda as its pick to become the next central bank governor, with investors betting that the surprise choice could preclude an end to the unpopular yield control policy.The Japanese yen strengthened 0.1 percent to 132.27 per dollar. The yen dropped sharply last year to a 32-year low of 151.94 per dollar as U.S. rates rose and Japanese rates stayed near zero, but it has since recouped those losses as the Fed looks to pause its tightening while speculation increases that the BOJ will move away from its ultra-loose policy.
Data on Tuesday showed Japan’s economy averted recession but rebounded much less than expected in October-December as business investment slumped, meaning an exit from stimulus will prove a challenge for the BOJ.
