Muted UK Wage Growth Could Prompt GBP USD Exchange Rate Downtrend Ahead of BoE Meeting

June 13, 2017 - Written by Frank Davies

STORY LINK Muted UK Wage Growth Could Prompt GBP USD Exchange Rate Downtrend Ahead of BoE Meeting

As the Conservatives looked set to secure a confidence and supply arrangement with the Democratic Unionist Party (DUP) in order to shore up a minority government the Pound US Dollar exchange rate recovered some ground.

With the sense of political uncertainty in the UK diminishing somewhat investors were encouraged to pile back into Sterling, lifting it from its multi-week lows.

Even so, the outlook for the UK economy remains decidedly bearish thanks to an unexpected uptick in the May consumer price index.

As inflationary pressure rose from 2.7% to 2.9% on the year it exceeded the Bank of England’s (BoE) latest forecast, raising concerns over the deepening squeeze on consumers.

This could prompt the Pound to weaken on Wednesday if average weekly earnings fail to pick up sharply.

James Knightley, Senior Economist at ING, noted:

‘Tomorrow’s labour report is likely to show wage growth dipping slightly to 2%YoY so the squeeze on spending power is intensifying. Already, there are worrying signs for consumer spending with this week’s retail sales report likely to post a heavy decline given readings from the likes of the British Retail Consortium and Visa, the payment card company.’

Given that the UK economy relies heavily on strong levels of consumer spending to drive activity the prospect of a more severe wage squeeze could see the GBP USD exchange rate return to its recent lows.

Although the Federal Reserve looks to be on track to raise interest rates at its policy meeting on Wednesday the US Dollar has struggled to find any particular traction in the early week.

Both the May monthly budget statement and NFIB small business optimism index proved disappointing, adding to concerns that the world’s largest economy is not in the most robust health at present.

This increased speculation that policymakers will deliver a dovish hike, with the Fed likely to leave interest rates on hold for the rest of the year rather than pursuing a more aggressive pace of monetary tightening.

With an imminent hike already priced in by investors this leaves the US Dollar vulnerable to downside pressure, particularly if domestic data continues to disappoint in the coming days.

However, if the Fed takes a more optimistic view on the economy and monetary policy the GBP USD exchange rate could remain on a weaker footing.

While doubts remain over the Trump administration’s ability to deliver on its much-anticipated infrastructure spending and fiscal reforms the ‘Greenback’ is unlikely to be weighed down by political headwinds for the time being.

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TAGS: Dollar Pound Forecasts