UK Labour Market Cools; Government Spending Review to Shape Sterling Outlook

GBP

The Pound Sterling weakened to around 1.3456 against the US Dollar during European trading on Tuesday. This came after the UK’s Office for National Statistics reported a slowdown in the labour market for the three months ending April.

New jobs added totalled 89,000, down from 112,000 in the previous quarter, while the unemployment rate rose slightly to 4.6%, the highest since July 2021. This softening in job growth partly reflects the recent increase in employers’ National Insurance contributions, which rose from 13.8% to 15% in April as set out in the Autumn Statement.

Wage growth also eased, with average earnings excluding bonuses increasing by 5.2%, below forecasts and prior figures. Including bonuses, wage growth slowed to 5.3%. These softer wage and labour market trends may prompt the Bank of England to reconsider its recent “gradual and cautious” approach to monetary policy, following its 25 basis point rate cut in May that set the base rate at 4.25%.

For now, markets expect the BoE to hold rates steady at 4.25% at its next meeting on 19 June. Investors should anticipate continued volatility in Sterling this week ahead of the UK’s monthly GDP and factory output data scheduled for Thursday. Attention will also focus on Wednesday’s government spending review, which is set to announce £113bn in additional capital funding for energy, transport, defence, and health. However, this boost will be balanced by cuts to day-to-day departmental budgets, including policing, local government, and education. The review is expected to outline overall spending growth slowing to 1.2% annually, raising concerns over possible tax increases later in the year.

EUR

The euro-dollar pair has remained within a tight trading range, with volatility subdued. Holding a long position in EUR/USD comes with a roughly 2.5% annual cost, so traders are looking for a clear catalyst — most likely negative US news — to push the pair beyond current levels.

The day’s Eurozone economic calendar includes June’s Sentix Investor Confidence index and a speech by Austria’s Robert Holzmann, known as the sole dissenter in last week’s ECB rate cut. Neither event is expected to shift market sentiment significantly.

EUR/USD is likely to trade between $1.1370 and $1.1430 for now, with risks balanced for a breakout in either direction.

USD

The US Dollar has been steady against major currencies as markets await the outcome of ongoing US-China trade talks. The Dollar Index (DXY) hovered near 99.00, reflecting investor caution ahead of any concrete trade agreement.

Analysts note that while a continued dialogue is positive, meaningful market impact depends on actual trade terms being agreed. The White House remains optimistic about a breakthrough, citing possible easing of export controls and increased availability of rare earth materials.

Attention now turns to the US Consumer Price Index data for May, due Wednesday. Inflation is expected to have risen faster, with headline CPI forecast at 2.5% year-on-year (up from 2.3% in April) and core CPI (excluding food and energy) rising to 2.9%.

These figures will heavily influence expectations for the Federal Reserve’s next moves. Current market pricing, as tracked by the CME FedWatch tool, suggests no interest rate cuts before September.

Meanwhile, the US Dollar’s strong yield—above 4%—alongside other high-yielding currencies like the Norwegian Krone and the British Pound, supports carry trade strategies. The US jobs report last week reinforced confidence in the economy, and the data calendar this week remains light except for CPI.

Investors will also monitor a $58 billion Treasury auction tonight. Foreign investor participation will be key, as a weak auction could weigh on the Dollar, particularly USD/JPY. The Dollar Index is expected to trade between 98.80 and 99.40 unless trade talks produce unexpected news.

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