Pound Rises after UK Wage Data Proves Unexpectedly Strong,

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Searingly hot wage data will keep pressure on the Bank of England to raise interest rates further, which could in turn ensure the British Pound remains supported.

The Pound rallied against the Euro and Dollar on April 18 after the release of labour and wage data for March from the ONS, where it was revealed headline wages (bonuses included) rose 5.9% in the December-February period.

This is unchanged on an upwardly revised 5.9% reading for February and well above the consensus expectation of 5.1%.

"We have been discussing recently whether softening UK data will mean the Bank of England pauses at its 11 May policy meeting. Today's wage data suggest probably not," says Chris Turner,
Global Head of Markets and Regional Head of Research for UK & CEE at ING Bank.

"Sterling has enjoyed a modest lift from today's data," he adds.

But when bonuses are excluded the pay increase stood at 6.6%, which is ahead of the 6.2% expectation and unchanged on January's 6.6%.

The Bank of England will have wanted to have seen a clear slowdown in wages if it was to be convinced domestic inflationary pressures are cooling.

The outcome would give credibility to expectations for a further 25 basis point rate hike at the Bank's May Monetary Policy Committee meeting. "Not only were the January wage data revised upwards, but the February figures blasted past consensus," says Ellie Henderson, an economist at Investec.

The Pound to Euro exchange rate reflected expectations for another rate hike by spiking to 1.1332 in the immediate wake of the data release; the Pound to Dollar exchange rate rose back above 1.24 on the figures.

Driving higher wages was a rise in employment in the three months to February by 169K, which exceeds the 50K the market was expecting.

It is also a marked increase in employment when compared to the January reading of 65K.

"We have been constructive on GBP since November 2022 and believe this counter-consensus view has room to run further, especially in light of today’s strong labour market data," says Dominic Bunning, Head of European FX Research, HSBC Bank plc.

Above: GBP/EUR at five-minute intervals.

However, the UK unemployment rate actually unexpectedly picked up to 3.8% from 3.7%.

This can be explained by an increase in people looking for jobs who were previously economically inactive as the quarterly change to the inactivity rate was -0.4pps.

The development will be welcomed by Chancellor Jeremy Hunt who has been keen to increase workplace participation which shrunk in the wake of the Covid pandemic.

The boost to labour supply could therefore offer a welcome boost to the economy and help defy consensus expectations that the UK will be the worst-performing of the world's developed economies this year.

If anything, therefore, the real positive story for the Pound might well be the increase in the participation rate.

"Policymakers will also take particular comfort from the clear upward trend in labour market participation. On the 16-64 measure, participation in the labour market was reported at 78.9% in the three months to February, which although still below pre-pandemic levels is another improvement on the 78.3% low hit in the summer months of last year," says Ellie Henderson, an economist at Investec.

Looking ahead, the next key data release for Pound Sterling falls midweek with the release of inflation numbers for March.

A hotter-than-expected inflation figure could boost the Pound, however, there is also a risk that a significant rise raises concerns about the economic outlook.

"In 2022, a consumer income squeeze, driven by a sharp jump in supply-side inflation, weighed on the UK’s economic prospects, and similarly on GBP," says Bunning.

Indeed, what could matter most to the Pound from here is how real incomes perform, i.e. wages minus inflation.

"Much of that supply shock is reversing and with inflation set to fade sharply in the months ahead, real income gains could push closer to positive territory much sooner than many have expected," says Bunning. "Tomorrow’s CPI print for March will provide further insight on that front."