Wage Surge Sends Pound Sterling Higher Against Euro and Dollar

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The British Pound rose after UK wages unexpectedly jumped in October.

The Pound to Euro exchange rate (GBP/EUR) lifted to 1.2080 after the ONS said regular UK pay (without bonuses) rose to 5.2% in October from 4.9% and outstripped expectations for 5%.

When bonuses are included in the measure, wages rose 5.2% from 4.4%, beating the estimate of 4.6%. The FX market reaction included a rally to 1.2692 in the Pound to Dollar exchange rate.

These data make it clear wage pressures are building, which will bolster demand in the economy and keep inflation rates elevated above the Bank of England's 2.0% target. How will companies pay for the wage increases? Recent history tells us that they will raise the cost they charge consumers, also adding to inflation.

Rising bond yields and GBP exchange rates following the wage figures indicated the market has lowered expectations for the number of times the Bank of England will cut interest rates in 2025 in the wake of the data.

"Both rates, clearly, are incompatible with a sustainable return towards the 2% inflation target over the medium term, with the acceleration in earnings growth in October caused principally by an unfavourable base effect from 2023, coupled with this summer's above-inflation public sector pay deals feeding into the data," says Michael Brown, Senior Research Strategist at Pepperstone.

Unemployment was unchanged at 4.3%, while the number of vacancies available in the economy fell 3.7% in the three months to November from the previous quarter. The estimate of payrolled employees fell 35k month-on-month in November after a fall of 5k in October. 

"Labour market cooling is evident but remains incremental, with payrolled employee numbers showing little change in 2024 and wage growth still rising. However, businesses are likely to feel the pinch from the recent national insurance rise, which could keep a lid on hiring and wage increases as they navigate higher employment costs," says Lindsay James, investment strategist at Quilter Investors.

Goldman Sachs point forecasts for 2025 are out, showing ongoing resilience for GBP/EUR. But how high can the exchange rate go? Find out more.

Economists think businesses will adopt a more constrained hiring approach in the new year as they prepare for the payroll tax increases the government introduced in October.

This is already evident in the more timely survey evidence, with the S&P Global PMI survey for December reporting that private-sector firms shed jobs at the fastest rate since the financial crisis (excluding the pandemic).

December data indicated a fall in total staffing numbers for the third month in a row.

UK service companies recorded a particularly steep decline in employment at the end of 2024, which the survey reveals was mainly linked to the non-replacement of voluntary leavers in response to rising employment costs.

Above: GBP/USD at 15-minute intervals showing the post-data reaction.

The Bank of England will make its next policy decision on Thursday and will likely respond to recent developments by maintaining interest rates at current levels. Given expectations that inflation will rise to 3.0% and signs of persistent pay pressure, the Bank will also have limited scope to soothe the British public by promising to step up the pace of its interest rate cuts in 2025.

This is a supportive development for the pound, as it implies that UK interest rates will remain above those of the Eurozone and most other countries, the U.S. excluded. This is why most GBP exchange rates retain a positive undertone, but GBP/USD continues to struggle.