Pound Sterling Firms Against Euro Following On-target Wage Data

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Pound Sterling firmed against the Euro after the ONS reported on-target wage numbers and a decline in the UK unemployment rate.

The Pound to Euro exchange rate traded at 1.1977 after the ONS said UK wages, excluding bonuses, grew by 4.9% in the year to June to August 2024. Including bonuses, it was up 3.8%.

Both readings were in line with expectations and are unlikely to materially alter expectations for the Bank of England's upcoming interest rate decisions.

However, an unexpected decline in the unemployment rate to 4% from 4.1% argues for a steady approach to cutting rates.

"Because the wage numbers met expectations, attention on Wednesday's inflation report will be hightened," says Alon Rajic at Moneytransfercomparison.com.

The Pound is 2024's best-performing major currency thanks to the Bank of England's cautious approach to cutting interest rates. A key risk to the currency's uptrend would involve an acceleration in the rate it cuts interest rates, which would happen if the UK data allowed.

These wage figures are not the smoking gun. However, they do paint a picture of a steady loosening of conditions in the labour market (i.e. falling vacancies and slowing job creation).

The ONS said there were 841,000 job vacancies in July to September 2024, down 34,000 on the previous three months, although still 45,000 above pre-COVID levels.

A slackening in labour market conditions would point to falling wage increases, which can ease domestic inflationary forces and allow the Bank to cut interest rates at a faster pace.

This would weigh on the Pound.

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"We reiterate our base case of successive BoE cuts from November onwards, with the BoE moving in 25bp clips, until August next year, when we see Bank Rate at 3.25%," says Bruna Skarica, Chief UK Economist at Morgan Stanley.

However, analyst Kenneth Broux at Société Générale says these data are not enough to push the Bank of England into a rate cut in December.

"The moderation in wage growth gives the BoE leeway to lower interest rates in November but another cut in December looks less likely," he says. "Rising participation and falling unemployment mean the labour market remains tight."

The inconclusive feedback coming from the labour market could mean a greater emphasis is placed on Wednesday's inflation numbers, where the headline CPI inflation rate is expected to dip below 2.0% again.

This will be courtesy of the fall in oil prices into September, meaning the Bank could look through the decline and keep a beady eye on the rate of services sector inflation.

This is expected to remain above 5.0%, which would not be consistent with headline CPI inflation falling below 2.0% on a sustained basis.