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Pound to Euro: Tests 1.1700 as Sterling Pound Retreats UK Wages Slowdown

March 12, 2024 - Written by John Cameron


The Pound Sterling retreated on Tuesday after slightly softer than expected UK labour-market data with markets slightly more confident over a Bank of England (BoE) rate cut by August.

The Pound to Euro (GBP/EUR) exchange rate retreated to test 1.1700 from Monday highs at 1.1750 and further away from key resistance at 1.1765.

The Pound did secure some protection from gains in UK equities with a 0.8% advance for the FTSE 100 index and will gain net support if risk appetite holds firm.

ING commented; “The pound is trading on the soft side after this morning’s data, with EUR/GBP once again failing to find much support at the low 0.85’s. (1.1765 for GBP/EUR) Today, the focus will be on speeches by Bank of England Governor Andrew Bailey and hawkish member Catherine Mann.”

US inflation data will also have a substantial impact on the Pound.

UK labour-market data was released on Tuesday with the main focus on wages given the importance for inflation expectations and the BoE policy stance.

The headline annual increase in average earnings slowed to 5.6% from 5.8% previously and slightly below consensus forecasts of 5.7%.

There was a similar picture for underlying earnings with a marginal slowdown to 6.1% from 6.2% previously. This was the slowest rate of increase since October 2022.

Private-sector wages growth slowed to 6.0% from 6.2%.

According to ING; “Since this is published as a moving average, a big base effect should add pressure in the next couple of months and push it below 6.0%, according to our economist.”

The unemployment rate increased to 3.9% in the three months to January from 3.8% previously and above consensus forecasts of 3.8%.

The latest estimate of payrolls recorded an increase of 20,000 for February.

Vacancies declined for the 20th successive month, but there was a small increase in the inactivity rate, especially for younger people which will tend to restrict labour-market supply and could maintain upward pressure on wages.

According to ONS director of economic statistics Liz McKeown; “If we look over the last year we’ve seen that increases in inactivity have been concentrated in the younger age groups, particularly in that 16-24 year-old age group. We’ve seen that increase by 248,000 over a year.”

According to Tony Wilson, director at the Institute for Employment Studies; “In our view this is holding back the recovery as the economy is continuing to create jobs, with nearly a million unfilled vacancies reported today.”

There was a limited shift in money-market expectations with three BoE rate cuts to 4.50% priced in by the end of 2024.

Paul Dales, chief UK economist at Capital Economics, commented; “The easing in wage growth in January is probably still a bit too slow for the Bank of England’s liking. But there are encouraging signs that a more marked slowdown is just around the corner and that an interest rate cut in June is possible.”

Yael Selfin, chief economist at KPMG expressed some caution; "Today's data are unlikely to warrant a major policy shift from the Bank of England, particularly with pay growth still robust and continued worries it could lead to a persistence in price pressures."

Nevertheless she added; "However, we expect the labour market to weaken in the coming months, which should reduce momentum in wage growth and raise the prospect of interest rate cuts from the summer onwards."

RSM UK economist Thomas Pugh, took a similar view; “wage growth is slowing much more quickly than the headline figure suggests and inflation will soon be back below 2pc.”

He added; “this will set the stage for a first rate cut in the summer and for interest rates to end the year at 4.5%.”

ING expects the BoE will wait for further data; “Our base case is that the Bank waits until August, at which point it should have enough evidence that both wage growth and services inflation have eased sufficiently to be able to start cutting rates.”
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