UK Labour Market Eyed as BoE Turns Dovish

European markets are expected to open a little higher on Wednesday, following a weaker start to the week in which investors locked in some profits after five weeks of solid gains. Investors have been undeterred so far by the prospect of a Fed rate hike in December – the odds of which grew significantly after Friday’s stellar jobs report – although this could change should we see a repeat of August’s emerging market chaos.

As of yet we haven’t seen any indication that a repeat performance is likely, with even weaker Chinese data this week having only minimal impact. There was a fear that this could have been a trigger for another sell-off but Chinese markets in particular have been very resilient as any weakness in the data makes more monetary easing even more likely.

The data released this morning was fairly mixed as industrial production rose by only 5.6% but retail sales growth was slightly higher than expected at 11%. Meanwhile fixed asset investment was in line with expectations at 10.2%. The weaker industrial output figures could apply further pressure to commodities today as demand growth continues to soften.

This morning we’ll get the latest U.K. labour market data which is expected to show unemployment remaining steady at 5.4% but wages rising again in the three months to September, by 3.2%. This is great news for the U.K. consumer and made all the better by the fact that we’re currently seeing prices falling. It’s also great news for the U.K. economy which continues to be heavily reliant on the consumer, particularly as we approach the crucial holiday period.

Still, the Bank of England is resisting the temptation to raise interest rates and has even pushed back expectations for this to the end of next year, despite previously suggesting it may consider it at the turn of the year. The OECD is not on the same wavelength and instead suggested that the BoE should consider raising rates early next year. If the economy continues to improve and emerging market risk dissipates, I’m sure the BoE will reassess as it has repeatedly in the past as current conditions surely do not warrant record low interest rates, regardless of the headwinds from abroad.

ECB President Mario Draghi’s comments in Brussel’s this morning are likely to attract a lot of interest coming less than a month before the meeting at which the central bank is expected to announce further stimulus measures. What makes this more interesting is that the Fed, in maintaining its stance on an interest rate hike this year, may have done part of the ECBs job for it, although it would never admit this as it isn’t meant to base monetary policy decisions on exchange rates. The weakening of the euro recently may encourage the ECB to delay its easing intentions and re-evaluate in a few months, although we’ve yet to get any suggestion that this is the case.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.