Sterling Pushed Lower, Pound to Dollar Rate Trades Below 1.2150

October 17, 2023 - Written by Toni Johnson

STORY LINK Sterling Pushed Lower, Pound to Dollar Rate Trades Below 1.2150

Transatlantic Economic Data Releases Push the Pound Lower, GBP/USD Exchange Rate Trades Below 1.2150

The combination of slightly weaker-than-expected UK wages data and a firm US retail sales release pushed the Pound to Dollar (GBP/USD) exchange rate below the 1.2150 level and a weak UK inflation release could drive further losses towards 1.2000.

The UK headline annual increase in average earnings (AWE) 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.

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.

The data overall contained clear evidence of a weaker labour market.

In comments on Tuesday, BoE member Dhingra maintained a dovish stance; "Now when the labour market is really loosening it's very hard to imagine where further momentum in wage growth is going to come from."

She added; "We should see some relenting of domestic inflationary pressures."

MUFG commented; “The softer AWE reading for August should support market expectations for the BoE to keep rates on hold again at the next MPC meeting on 2nd November.

Joshua Mahony, chief market analyst at Scope Markets commented; “with the BoE undoubtedly concerned at the rise of wages over recent months, today’s decline eases concerns that we could see another rate hike in the near term."

Money markets are now pricing in just over a 75% chance that the BoE will leave rates on hold at the November meeting.

ING noted there are two big releases this week; “Today’s UK wage data was always going to be one of two key tests ahead of the Bank of England’s November meeting. And at first glance, there’s nothing that’s likely to push the committee towards another rate hike.”

The latest UK consumer prices data will be released on Wednesday.

Consensus forecasts are for the headline inflation rate to edge lower to 6.6% from 6.7% which would be the lowest rate since March 2022.

The core rate is forecast to decline to 6.0% from 6.2% which would be the lowest reading since April this year.

ING noted the importance of services-sector inflation; “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.”

According to MUFG; “We expect the report to show further evidence that inflation pressures are easing. A softer CPI reading would drag the pound towards the bottom its recent trading ranges against the EUR and GBP.”

International developments will also remain important for the Pound and the currency will be vulnerable if regional tensions intensify.

As well as geo-political considerations, the US data releases will be important.

US retail sales increased 0.7% for September compared with expectations of a 0.3% increase and the August increase was revised higher to 0.8% from 0.6%.

The closely watched control group also increased 0.6% after a revised 0.2% increase previously.

HSBC expects the US economy will underpin the dollar. It noted; “Some may believe that USD strength will reverse soon, especially given its overvaluation. However, the USD has been steadily strengthening over the past decade and it has been overvalued, as measured by the real effective exchange rate (REER), over the same period. We believe USD strength will be sturdier this time round.”

On GBP/USD, Scotiabank commented; “Loss of support at 1.2125 will edge risks towards a retest of 1.20 area in the next day or so, given soft/bearish underlying momentum.

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TAGS: Pound Dollar Forecasts Pound Sterling Forecasts