Pound sterling exchange rates: Is the March slump now over?

By Gary Howes

The pound sterling (Currency:GBP) was the second-best performing major currency after a busy Wednesday proved to be supportive.

We consider what went on in the labour market and at the Bank of England to support the UK pound. 

After enduring losses for much of March, Wednesday the 19th could be viewed as the day that momentum swung back to favour the UK unit. It was however the US dollar that was the best performer thanks to the strong message regarding future US interest rate rises issued by the US Fed.

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Why is the pound exchange rate complex higher today?

The BoE voted unanimously to leave both QE and interest rates on hold, at £375bn and 0.5%, respectively, at their March meeting, in line with market expectations.

BoE members thought that there had been limited news since their previous meeting to materially change the outlook and, indeed, the broader debate at the meeting contained little news at all, in the view of the team at Bank of America Merrill Lynch.

BofA warn that some elements of UK monetary policy may be in limbo moving forward:   

"More broadly, the large changes to the hierarchy of the BoE announced yesterday were quite neutral regarding the future composition of the Committee, with both a more dovish member (Fisher) and a more hawkish member (Dale) leaving.

"But the changes may suggest that monetary policy could be somewhat in limbo over the summer: between the May and August Inflation Reports, 3 members of the BoE will change (Bean, Dale and Fisher will leave, replaced by Haldane, Shafik and whoever replaces Broadbent), potentially reducing the chances of action over that period.

"That said, the BoE is not expected to raise rates until next year anyway, so the summer was not expected to be a crucial time for key monetary policy decisions."

Unemployment flat at 7.2%, wage growth rising

What really kick-started the GBP today was the good employment data that came through.

The unemployment rate was flat, at 7.2%, in the 3 months to January.

That was in line with consensus, although around 30% of economists (incl. BofAML) forecast a decline to 7.1%.

On an unrounded basis, the unemployment rate was 7.153%.

Employment continued to grow strongly, with the 105k gain in the 3m to January still above the pre-crisis average of around 70k, albeit having slowed notably from the record 40-year high pace of 280k last Autumn.

"Other measures of slack in unemployment were also unchanged over the month (Chart 1). Adjusted for the elevated number of people working part-time who want to work full-time, the unemployment rate was flat, at 8.5%. And adjusting for average hours worked being notably above their long-run trend, the unemployment rate was flat, at 5.5%," say Bank of America.  

Wage growth showed further incipient signs of strengthening.

"The most relevant indicator, in our view, is private sector wage growth excluding bonuses (since wages in the public sector are driven by fiscal priorities, not underlying demand and supply). On that basis, 3-month wage growth rose from 1.3% to 1.6% and, on a YoY basis, it rose to a somewhat firmer 2.3%," say BofA.

That adds to other evidence of stronger wage pressures in recent months, such as recruitment surveys.

While wage growth, nevertheless, remains benign compared with its pre-crisis average of around 4%, the firmer tone in recent months chimes with a range of other evidence suggesting that slack in the economy is narrowing.

"With it being appropriate to start tightening monetary policy well before slack in the economy is fully closed (as noted by BoE member Charlie Bean recently), we continue to look for a first rate rise in February next year," say Bank of America.