Pound Sterling Slides vs Euro, Dollar as Wages Data Reinforces Peak Bank Rates

October 17, 2023 - Written by James Fuller

STORY LINK Pound Sterling Slides vs Euro, Dollar as Wages Data Reinforces Peak Bank Rates

Pound Sterling (GBP) was able to make headway against the Euro (EUR) and Dollar (USD) on Monday with significant support from gains in UK and global equities.

With a slightly softer US currency, the Pound to Dollar (GBP/USD) exchange rate secured net gains to around 1.2215.

The latest data on UK wages was slightly weaker than expected which reinforced expectations that the Bank of England would decide against further interest rate hikes.

In response, the Pound lost ground with GBP/USD retreating to 1.2155.

The pound-to-euro (GBP/EUR) exchange rate advanced to 1.1570 on Monday before a retreat to 1.1540 on Tuesday as underlying ranges held intact.

The UK FTSE 100 index posted a further advance which helped cushion the pound.

The dollar is still being supported by expectations of a tight Federal Reserve policy and defensive support from concerns over the Middle East situation.

US data will be watched closely with the latest retail sales report on Tuesday.

Commerzbank expects a firm dollar tone; “Of course, the data could disappoint today. But this would hardly be enough to dissuade economic optimists. This would therefore hardly weigh on the USD.”

It added; “And as long as there is no easing of the Middle East conflict, the USD is likely to remain in demand anyway.”

Unicredit expects a subdued US release; “Far-from-buoyant data releases in the US are likely to help sterling.”

The Office for National Statistics (ONS) released only a partial labour-market report with some of the data delayed due to a lack of survey responses.

In particular, there was no updated data on the unemployment rate.

The headline annual increase in average earnings slowed to 8.1% in the year to September from 8.5% previously and below consensus forecasts of 8.3%.

Underlying earnings met expectations at 7.8% from a revised 7.9% previously. This was the first retreat in this data series since January.

Real wages posted a net increase for the first time in two years.

The ONS also reported that the number of people on company payrolls declined 11,000 for September after an 8,000 decline for August.

Employment was still 1.2% higher over the year.

There was also a decline in vacancies for the 15th successive month with the quarterly data recording a 4.2% decline from the previous 3-month period.

According to KPMG UK Chief Economist Yael Selfin, there is evidence of cooling demand and an easing of labour shortages.

A softer labour market would offer reassurance to the Bank of England.

She also noted that real wages were increasing; “While the overall momentum of the economy is weak, the expected easing of inflation, coupled with earlier pay awards and the increase in the National Living Wage, should provide further improvements in consumers’ purchasing power and help alleviate the pressure on households.”

The Bank of England will be watching wages data very closely, especially with chief economist Pill stating that not all indicators were pointing in the same direction.

According to Emma Mogford, fund manager at Premier Miton Monthly Income Fund; “With the number of employees on payroll falling and wage inflation below expectations, this gives the Bank of England more reason to pause its interest rate increases.

Ashley Webb of Capital Economics took a similar view; “Cooling labour market conditions appeared to start feeding through into an easing in wage growth in August. That supports our view that interest rates have peaked at 5.25%.”

Webb, however, expects no interest rate cuts until late 2024.

RSM UK economist Thomas Pugh, added; “Overall, the loosening in the labour market seems to be slowly feeding through into easing pressure on wages, that should satisfy the MPC that it just needs to be patient in order to see wage growth and inflation return to more normal levels, rather than resuming rate hikes.”

According to ING; “While wage growth is still much too strong for the Bank of England's liking, there's nothing in the latest data that's likely to push the committee into a rate hike at the November meeting.

The UK will release the latest data on Wednesday and the data will also be crucial for interest rate expectations.

Strong data would renew pressure for further BoE rate hikes while weaker than expected data would lead to further rate hikes being priced out entirely.

ING noted; “As for the November Bank of England meeting, we still have to wait on services inflation due tomorrow. This has been volatile, though our best guess is that this notches fractionally lower – and should continue to do so over coming months as the lagged effect of lower gas prices feeds through. Any unpleasant upside surprises could be enough to tempt the Bank into a resumption of its rate hike cycle in November.”

MUFG expects little change in the narrative; “It would though take a big upside inflation surprise in tomorrow’s CPI for September to shake up expectations that the BoE will stay on hold next month.”

Overall, ING commented; “it looks like EUR/GBP can grind towards 0.8700 - should tomorrow's release of September CPI also point to a benign outcome.” (1.1495 for GBP/EUR)

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TAGS: Pound Dollar Forecasts Pound Euro Forecasts