Pound Sterling Falters on Wage Growth Fears

Published on: Jan 15, 2024|3 min read

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London: 15 January 2024 (TraderMade): The pound is poised for a rollercoaster ride as Britain faces its pivotal labor market data tomorrow. Wage growth, the inflation bogeyman, takes center stage, holding the key to economic anxieties and BoE policy decisions. Will a soft landing see the pound soar, or will wage woes send it spiraling down?

The GBPUSD pair dipped by 0.15% to 1.27317 at about 11:48 AM GMT.

Key Takeaway

The mixed signals from policymakers and the quiet US market create an environment of uncertainty.
Keep a close eye on the earnings data and upcoming US releases for further clues about the pound's trajectory.

GBPUSD Trajectory Over The Last Month

The GBPUSD chart below shows exchange rate movements from 16 December 2023. The GBPUSD pair peaked on 28 December to 1.28278, and was the lowest on 3 January at 1.26164. This shows a decline of 1.65%.

GBPUSD Chart

The Recent Developments

Pound in Limbo

Market participants watch tomorrow's UK labor market data, particularly the average earnings figure. Soft wage growth may be a double-edged sword for the pound. While it offers hope for taming inflation and sparking BoE rate cuts, it might raise concerns about a weaker economy and dampen investor sentiment.

Earnings in Focus

The market is bracing for a potential dip in average earnings, possibly from 7.3% to 6.6% (excluding bonuses). This, coupled with a projected slight rise in unemployment, could finally break the link between stubbornly high wages and persistent inflation, providing much-needed relief to policymakers.

BoE Crossroads

A significant decline in wage growth could push the BoE towards earlier rate cuts than expected. Bank of America even predicts a potential pivot as early as August, significantly sooner than the February 2025 timeline hinted at earlier.

However, BoE officials remain publicly hawkish, reiterating the need for higher rates to curb inflation. This creates a mixed picture for investors, keeping the pound volatile.

Market Musings

Trading volume may be muted due to the US holiday, further adding to the pound's uncertainty. On the flip side, the US dollar index is also treading water ahead of key data releases later in the week, including retail sales and the Fed's Beige Book.

US Pivot Looms

Softer-than-expected US producer price data fueled investor bets for a Fed rate cut in March. The CME FedWatch tool now shows a 70% chance of easing, up from 62% just a week ago.

This may support the pound, as a weaker dollar generally benefits riskier assets like equities and emerging market currencies.

Real Estate Glimmer

Amidst the economic anxieties, the UK's real estate sector shows a surprising hope. Rightmove reported a 1.3% increase in asking prices in the first week of January, the highest since 2020.

This could indicate resilience in the housing market despite inflationary pressures and a positive signal for long-term economic growth.

Bottom Line

The pound remains vulnerable to tomorrow's UK labor market data, with wage growth taking center stage. A significant drop could pave the way for earlier BoE rate cuts and potentially offer some reprieve to the currency.