GBP to USD Exchange Rate Surges Past Key 1.40 Level on UK Wages Report

January 24, 2018 - Written by Ben Hughes

STORY LINK GBP to USD Exchange Rate Surges Past Key 1.40 Level on UK Wages Report

Thanks to Wednesday’s UK job market report, the British Pound to US Dollar exchange rate has continued to see solid gains. Pound Investors were particularly impressed by Britain’s latest wage growth data, which beat expectations slightly and boosted Bank of England (BoE) rate hike bets.

Despite nearing the key psychological resistance level of 1.40 for the first time since the Brexit vote in 2016, GBP/USD broke through without much issue on Wednesday. The pair has climbed from 1.3855 to near a high of 1.4104 this week so far – its best level since June 2016.

GBP Gains Extended on Britain’s November Job Market Report

Britain’s job market appeared to be seeing stronger than expected performance in late-2017, despite the concerns of the ongoing Brexit process, according to the latest economic data.

Wednesday saw the publication of UK employment stats for the three months leading into November. The key unemployment rate remained at 4.3% as forecast but the employment change figure rose to 102k despite being predicted to come in at 56k.

But the print that impressed Pound investors most was the latest average wage excluding bonuses result. The figure was forecast to remain at 2.3%, but unexpectedly rose to 2.4%.

This indicated that British wages were growing at a faster pace than expected and boosted hopes that wages could catch up to UK inflation within the coming year.

The data also caused Bank of England (BoE) interest rate hike bets to rise. According to Matthew Brittain from Sanlam UK;

‘The real worry [for the UK economy] is centred around the consumer where wages have been increasing at a lower rate than inflation (ie falling in “real” terms). So another bright spot in this release is that weekly earnings ticked up from 2.3 to 2.4% versus a year ago, which is still lower than inflation (3%) but at least the gap is steadily being closed

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Since the data makes it slightly more likely that the Bank of England will increase interest rates later on in the year the immediate reaction is a rise in sterling to £1.41 with bonds and equities both under a little pressure.’

As the Pound outlook rose, GBP/USD easily held above the key level of 1.40.

Sterling investors largely brushed over December’s jobless claims data, which saw a higher than expected number of new jobless claims made at the end of 2017.

USD Weighed by Market Concerns of US Trade Crackdown

As well as a lack of strong US data in recent sessions, the US Dollar has been unappealing this week due to lasting uncertainty about the Federal Reserve’s monetary policy outlook, as well as uncertainty in US politics.

Indeed, much of Wednesday’s Pound strength also has a lot to do with the US Dollar’s weakness.

On Wednesday, officials from the US government spoke at the World Economic Forum (WEF) at Davos indicated that the US President could be gearing up to take a tougher stance on US trade links this year.

US Treasury Secretary Stephen Mnuchin stated at Davos that the White House was not worried about weakness in the US Dollar, which caused concern that there could be further weakness ahead for the currency too.

GBP/USD Forecast: Could US Dollar Selloff Be Overdone?

Key Q4 Gross Domestic Product (GDP) projections from both Britain and the US will be published on Friday and could influence a change in GBP/USD trajectory before the end of the week.

With investors finding the Pound increasingly more appealing, a poor UK growth report and a strong US one could cause a GBP/USD selloff, especially with many analysts still arguing that the US Dollar is oversold.

According to Neil Wilson, market analyst from ETX Capital;

‘Trade concerns are trumping the Trump tax policy as far as the Dollar is concerned. And the focus on the Dollar’s slide seems to be dampening the mood generally in equity markets.

Nevertheless, Dollar softness may well be overdone and shorts could be squeezed when GDP figures for the fourth quarter are released, which are likely to confirm yet more acceleration in growth in the US and could see markets bet on a faster pace of tightening by the Fed than currently priced in.’

As a result, Pound to US Dollar investors are now looking ahead to Friday.

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