Pound Sterling Holds Gains, Even as Wage Deceleration Gives Bank of England Cause to Pause

Above: UK wage dynamics. Source: ONS.

The British Pound rose against the Euro and defended its recent sizeable gains against the U.S. Dollar following the release of data that showed the UK's labour market remained 'tight' and kept alive the prospect of another rate hike at the Bank of England on March 23, although some economists argue a pause is now increasingly likely.

The UK's unemployment rate read at 3.7% said the ONS, defying the market's expectation for a rise to 3.8%, helped by an increase in employment of 65K in the three months to January.

This is a stronger increase in jobs than the market consensus expectation that was set at 52K.

Average earnings - with bonuses included - increased 5.7% in January, in line with expectations but down on the previous month's 6.0%, (although this figure was revised higher by the ONS).

Average earnings - without bonuses - missed expectations (6.6%) with a reading of 6.5%, representing a further slowdown from December's 6.7%.

The wage figures are consistent with inflationary developments in the domestic UK market and would likely push the Bank of England into another 25 basis point hike on March 23. However, some economists see a marked slowdown in wage growth that could prompt the Bank of England into keeping rates unchanged.

Pantheon Macroeconomics says wage growth has slowed substantially, despite the modest increase in labour market slack with the annualised month-to-month growth in private-sector wages, excluding bonuses, dropping "to just" 1.2% in January, from an average of 6.9% in the previous 12 months. This is down on December's slow 2.0% increase.

"Today’s labour market report strengthens the case for the MPC to hold back from raising Bank Rate further next week, which already had been bolstered by the collapse of two U.S. banks over the weekend," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.

"The clear slowdown in wage growth strengthens the case for an MPC pause," he adds.

The Pound was nevertheless firmer following the data, with global events clearly in the driving seat for foreign exchange markets.

U.S. bond yields have tumbled in the wake of the Silicon Valley Bank fiasco as investors slashed bets for future Federal Rate hikes.

But because Bank of England rate hike expectations were relatively more subdued than in the U.S. and Eurozone, there was less scope for a pullback in UK yields.

As such, the Pound is outperforming in the current environment, particularly as the latest set of data underscores the general view the UK economy continues to perform better than was expected at the turn of the year.

Following the wage figures the Pound to Euro exchange rate was seen a third of a per cent higher at 1.1384.

The Pound to Dollar exchange rate was unchanged at 1.2168, having advanced a sizeable 1.25% the day prior.

Above: GBP/USD at four-hour intervals. Consider setting a free FX rate alert here to better time your payment requirements.

Looking at the other labour market vitals shows the supply of labour into the economy continues to increase: the ONS reported the economic inactivity rate decreased by 0.2 percentage points to 21.3% in the quarter to January.

Job vacancy numbers meanwhile retreated, although they remain elevated by historic standards and suggest firms continue to struggle to find workers.

The number of vacancies available in the December 2022-February 2023 period was 1,124,000, a decrease of 51,000 from September to November 2022. The unemployment rate is therefore unlikely to materially rise over the coming months owing to the significant amount of vacancies on offer.

Above: UK vacancies. Source: ONS.

Money markets now show investors are no longer fully priced for a rate hike on March 23, largely a response to the paring of hike expectations across the globe following recent banking stresses in the U.S.

This, combined with the slowdown in wage growth, could therefore push the Bank into a pause.

Analysts at Barclays are also picking up on the deceleration in wage growth.

"The most eye-catching element of today's print in our view was the softening wage growth, which should be encouraging for the Bank of England," says Abbas Khan, an economist at Barclays.