GBP USD Proves Volatile as UK Wage Growth Disappoints

October 18, 2017 - Written by John Cameron

STORY LINK GBP USD Proves Volatile as UK Wage Growth Disappoints

The Pound US Dollar exchange rate has fluctuated back and forth today with UK wage growth continuing to lag behind inflation levels and a speech from Bank of England (BoE) Governor, Mark Carney, failing to appease the markets.

UK Wage Squeeze Lingers, Pound (GBP) Encumbered

The UK’s wage squeeze continues, with wage growth in the UK (excluding bonuses) dropping in August from 2.2% to 2.1%, below the forecast of a 2.2% rise.

This data essentially illustrates that whilst the economy is seemingly good at creating jobs (UK unemployment remains at lowest levels since 1975) it continually fails at generating pay rises - an issue exacerbated by the UK’s soaring levels of inflation.

On one hand, this news has been greeted by economists simply as further evidence that the BoE will have to move towards raising interest rates in November, with inflation already hitting 3% (and on track to rise to 3.1% in October).

On the other hand, it illustrates on-going weaknesses within the UK’s economy - news that, when combined with Mark Carney’s recent speech, has effectively quelled investor demand.

Carney’s speech is notable in that investors were expecting him to take a firmer stance on the possibility of a rate hike in November. Instead, Carney’s word choice was purposefully obscure, stating that a rate hike might be appropriate ‘in the coming months’.

Some economists have gone as far as suggesting that Carney might have been purposefully trying to cool rate hike speculation, just in case weak data between now and November kills the possibility of tighter monetary policy.

Regardless, his comments quickly weighed on the Pound, effectively allowing the US Dollar to take the lead.

USD Strong Despite Disappointing Data Prints

Despite various dips in demand on the back of disappointing US data prints the ‘Greenback’ has maintained its lead over the Pound today, taking support from a jump in US treasury yields.

Benchmark 10-year US treasury yields were demonstrated to have hit a six-day high, whilst 30-year bond yields also jumped to a five-day high.

The ‘Greenback’s’ strength has also been reinforced by comments today from Fed Policymaker William Dudley, who asserted that US tax reform will foster more business investments, increased productivity and overall promote domestic economic growth.

Dudley referred to the current tax system as overly complex, stating that it ‘cannot be productivity enhancing’ - further acknowledging the need for tax reform.

There are also rising hopes that Washington is moving closer to reaching a deal on tax reform, with Senate Republicans working on Tuesday for more support for a budget resolution that could prove vital in US President Donald Trump’s push for an overhaul.

This news, combined with recent optimistic comments regarding the possibility of a third rate hike in 2017 from Fed Chair Janet Yellen, pushed GBP USD down lower.

GBP USD Forecast: Volatility Ahead on UK Retail Sales and Fed Business Outlook

The Pound US Dollar exchange rate could become increasingly volatile tomorrow on the release of the UK’s retail sales and the Philadelphia Fed manufacturing index.

UK retail sales are forecast to drop from 2.8% growth in the previous period to growth of 2.2% in September (year-on-year), an eventuality that could drive GBP USD down even further.

Conversely, the Philadelphia fed manufacturing index is forecast to fall from 23.8 to 22, whilst Fed policymaker Esther George is due to speak on monetary policy – both events that could provoke volatility within this pairing.

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TAGS: Currency Predictions