Pound Slips on Disappointing Earnings Data

• Pound to Euro exchange rate today: 1.1792, up 0.02% on yesterday
• Euro to Pound Sterling exchange rate today: 0.8481
• Pound to Dollar rate: 1.2435, down 0.27% on yesterday

The British Pound fell against its major rivals on Wednesday, February 15 after it was shown that UK companies are not raising pay rates to the extent economists were expecting.

Latest labour market data from the ONS shows that the Average Earnings Index, with bonuses included, rose at 2.6% in December.

Economists had forecast a rise of 2.8%, in line with the previous month’s reading.

The Pound slipped against all major G10 currencies on the miss as the data suggests the Bank of England will be in no mood to raise interest rates in light of the setback in earnings.

Other data in the release were good though with the unemployment rate staying steady at multi-year lows at 4.8% and the amount of people seeking benefits falling an impressive 42.4K.

The economy is therefore creating work, but there is a large enough pool of candidates out there to ensure that pay rises remain subdued.

Only when a labour shortage is seen will pay packets start rising, and only then will the Bank of England consider raising interest rates… and only then will the Pound find the upward support from interest rates it requires to stage a meaningful recovery.

This is the dynamic that is currently in play at present.

"The markets are focusing on wage data as it will be a key driver of monetary policy this year. If wage growth rises sharply then central banks should hike interest rates at a faster clip than currently expected. However, today’s weaker wage data could take the pressure off the BoE, hence the decline in UK bond yields this morning, which has also weighed on the Pound," says Kathleen Brooks at City Index in London.

Of course, there is also a chance that companies are using Brexit to justify not paying workers more and with years of negotiations ahead this situation may not change.

This adds to the sense that Sterling is likely to struggle going forward.

Pound Sterling fell in the wake of below-expectation inflation data on Tuesday February 14 as the currency now appears more reactive to data and Bank of England interest rate expectations than it has for some time now and not just driven by utterances made by politicians regarding Brexit.

At their February Inflation Report the Bank of England cut the “equilibrium rate of unemployment” to between 4% and 4.75%, from 5%.

This means that the Bank believes the jobless rate could fall further, before it would have to raise interest rates. And only when markets see interest rates as likely to rise will they bid the Pound higher.

"Labour market data, both as an indication of the amount of slack in the economy and whether that is translating into a rise in labour costs, will become increasingly important," says a note from Lloyds Bank Commercial Banking.

EUR/GBP Outlook

From a currency perspective, analyst Piet Lammens at KBC Markets in Brussels says Sterling is likely to struggle against the Euro going forward.

"We don’t expect today’s data to be Sterling-supportive," says Lammens. "The picture of EUR/GBP remains indecisive/fragile, but this is partially due to Euro weakness, rather than outright Sterling strength. We continue to look how the test of the key 0.8540 support turns out. In case of a break, the 0.8304 area is the next medium-term support. At least partially stop-loss protection on EUR/GBP longs may be considered."

GBP/USD Outlook

With regards to the GBP/USD, the outlook has deteriorated somewhat.

"Yesterday’s sharp sell-off combined with falling momentum leaves the bias today to the downside, but there is a risk that is limited to the 1.2420/1.2390 area of support in the very near–term," notes analyst Robin Wilkin at Lloyds Bank Commercial Banking.

While this holds Wilkin believes the pair is at risk a rebound to 1.2490/1.2550 interim range highs, before a deeper slide within the medium-term range.

"A breakdown through 1.2390, opens the 1.2350/45 reaction lows from earlier this month, with a break there opening 1.2260/1.2140 supports ahead of the 1.20/1.1980 range lows," says Wilkin.