Pound Rebound Supported by Fastest Pickup in Wages Since 2008

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- GBP supported by hawkish employment report for September.

- Wages rise at fastest since 2008, but unemployment ticks up.

- Looming Brexit deadline and reports of deal to dominate GBP.

The Pound drew support Tuesday from a labour market report that showed British workers' wages rising at their fastest pace since 2008, as markets await the announcement of an EU withdrawal agreement by the Prime Minister. 

Average weekly wages for British workers rose by 3% during the three months to the end of September when bonuses are excluded from the numbers, up from 2.7% previously and in line with expectations.

This was the highlight of the release for Pound Sterling because it supports claims by the Bank of England (BoE) that pay pressures are mounting, and adds weight to arguments that interest rates might need to rise as a result.

"With pay growth rising while the signs on productivity are still mixed, the Bank of England will be keen to press ahead with rate hikes if a Brexit deal is agreed in order to keep on top of growing inflationary pressure," says Andrew Wishart, an economist at Capital Economics.

However, and on the downside, the unemployment rate rose 10 basis points to 4.1% when markets had anticipated it would remain at 4%.

The Office for National Statistics says there were 32.41 million people in work, 23,000 more than last quarter and 350,000 more than one year ago. 

But there was a 21,000 increase in the number of individuals classed as unemployed, which rose to 1.38 million. There were 8.74 million "economically inactive" people in the recent quarter, down from 8.75 million previously.

The September quarter's decline in inactive workers would have contributed to the increase in the number of individuals classed as unemployed, and so partly explains the lift in the unemployment rate. But it does not explain all of it. 

"Inactivity among working-age adults remained very low by past standards at 21.2%, but it still has scope to fall further, given the increase in government funding for childcare in recent years and the planned increase in the State Pension Age from next year to 66, from 65 currently," says Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics. 

The Pound was quoted 0.30% higher at 1.2894 against the Dollar following the release, broadly unchanged from before.

The Pound-to-Euro rate was 0.24% higher 1.1480. The Pound was higher against most G10 currencies Tuesday. 

Currency markets care about the labour data because of the influence that changes in unemployment and wages can have on inflation.

Faster wage growth means greater demand within an economy and higher inflation further down the line, which is important for the interest rate outlook.

Changes in interest rates are only made in response to movements in inflation but impact currencies because of the push and pull influence they have on capital flows and their allure for short-term speculators.

Bank of England officials have repeatedly emphasised the risks posed to the inflation outlook by faster wage growth and has said it will have to raise rates over coming years to keep consumer price pressures in check.

The BoE has already raised its interest rate twice inside the last year, taking it up to 0.75%, and markets currently see the bank raising rates around once every year until 2021.

However, most analysts say the next move is unlikely to come before the U.K. leaves the EU in March 2019, given uncertainty over the final outcome of negotiations and their potential impact on the economy. 

Prime Minister Theresa May is reported to be close to agreeing a deal covering terms of the U.K.'s withdrawal from the EU.

This is one week after the BBC reported leaked details of a government plan to launch a three-week media campaign designed to sell any deal, which could include a series of contentious concessions, to the British public. 

A deal covering terms of the U.K.'s withdrawal from the EU is the first precondition for the British currency to recover from lows reached during early November.

And passing it through the divided gauntlet that is the U.K. parliament is the second, final and most formidable obstacle blocking the path of Pound Sterling.

If the Withdrawal bill passes, the U.K. will enter "transition" between March and December 2020, during which time little will change as officials negotiate the future trading relationship.

Both sides have said disagreement over how to manage the Northern Irish border in the event another deal covering future trade cannot be reached is the main impediment to a withdrawal agreement.

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