Today, investors faced a challenging scenario with the release of the May labour report by the ONS, revealing a mix of elevated wage pressures and increasing unemployment. As the data unfolded, it became evident that despite the surge in wages, the Pound's response highlighted a clear prioritization: the significance of rising unemployment.

Following the ONS announcement that UK wages, including bonuses, soared by 5.7% in March compared to the anticipated 5.3%, GBP strengthened against the EUR, reaching 1.1642. Excluding bonuses, the wage increase surged even higher to 6.0%.

These numbers precede the expected rise in the minimum wage in April, indicating that wage pressures persistently outpace inflation. This trend might sustain elevated domestic inflation in the UK, potentially deferring any interest rate reductions.

However, despite the initial gains, the Pound experienced a reversal, resulting in losses, with GBP/EUR pair declining to 1.1614, down by 0.20% for the day.

Similarly, GBP/USD exchange rate initially climbed to 1.2558 before retracting to 1.2519. This retreat is attributed to indications of weakening labour market conditions evident in other data releases throughout the day: the UK economy shed 177,000 jobs in the three months leading to March, up from 156,000 in the preceding period. Concurrently, the unemployment rate edged up to 4.3% from 4.2%.

This implies that the potential for wages to rise to levels that generate inflation is constrained, and investors anticipate a significant cooling down as a consequence. In essence, if there's an ample pool of job seekers available, businesses won't feel compelled to retain excess labor.

Currently, foreign exchange markets are opting to overlook the high wage numbers, as evidenced by the Pound's relatively muted reaction.

Last week witnessed a retreat of the Pound Sterling, reflecting investor anticipation of the Bank of England signalling an imminent interest rate cut, a move which was subsequently confirmed during Thursday's policy update.

The Bank has articulated its intention to carefully assess the next two wage and inflation releases before determining the suitability of a rate cut in June. Consequently, if Tuesday's crucial wage figures from the ONS indicate a weaker-than-expected outcome, we should anticipate a resurgence of GBP weakness in the days ahead.

As market sentiment increasingly leans towards the likelihood of a June rate cut, GBP/EUR could experience further downside. Currently, market-derived expectations for a June rate cut stand at 45%, leaving considerable room for recalibration that could exert pressure on the exchange rate.

However, should earnings growth surpass the anticipated 5.3% year-on-year figure, we might witness a notable rebound in Pound-Euro towards the 1.17 mark in the near term.

Examining the charts, GBP/EUR finds support just above the 200-day moving average at 1.1618. Furthermore, downward momentum in GBP/EUR has somewhat abated, partly due to Sterling's post-GDP recovery on Friday. These technical signals hint at the emergence of support levels, implying a higher threshold for further weakness going forward.

Already positioned below its 2024 comfort zone, the exchange rate is poised for a potential 'mean reversion' in the upcoming days, contingent upon data releases. However, we do not anticipate the attainment of 2024 highs in the near future, given the market's requirement for convincing evidence that a June rate hike is off the table. Such evidence hinges significantly on forthcoming inflation data.

The impending inflation release in two weeks carries substantial weight, as any shortfall could tilt the probability of a June hike beyond the 50/50 mark, consequently pressuring Sterling as the month draws to a close.

It's crucial to note that the labour market and inflation figures for June will precede the Bank of England's decision, underscoring the pivotal role of forthcoming data in addressing uncertainties surrounding a June hike.

The Bank of England (BoE) is anticipated to maintain the Bank Rate at 5.25% today, aligning with both consensus and current market expectations. The likelihood of a rate cut in either June or August is currently uncertain, thus any indication of a dovish stance increasing the chances of a June cut could potentially weaken the pound.

GBP/USD remains below the $1.25 mark, while GBP/EUR stays above €1.16 as traders anticipate the "Super Thursday" meeting, which includes the BoE Monetary Policy Report revealing updated economic projections. It is anticipated that the BoE will revise its medium-term inflation outlook downwards, considering the disinflationary trend resembling that of Europe more than the US. Additionally, the MPC vote split may lean towards a more dovish stance, possibly with another policymaker, such as Ramsden, aligning with Dhingra in voting for a rate cut. Such a scenario would elevate the likelihood of a June cut, making relative rates unfavorable for the pound's value. Speculative traders have been positioning for a weaker pound, evidenced by the increase in GBP short positions, the highest since January 2023.

Although GBP/USD overnight implied volatility remains relatively stable, EUR/GBP overnight implied volatility surged to 8.6%, marking the highest level in three months. Option skews indicate a preference for topside, implying sterling might face increased downward pressure against the euro in response to a dovish tilt from the BoE today.