Pound Sterling Advances on G10 Basket after Wage Squeeze Eases and Unemployment Holds 42 Yr Low

The squeeze on UK wage packets has eased. Markets will now focus on Thursday's Bank of England meeting and European Council summit. 

The Pound advanced against the entire G10 basket Wednesday after the latest labour market report showed UK wage growth accelerating in October, while the unemployment rate held at a 42-year low.

UK wage growth picked up by 30 basis points to +2.5% for the three months to the end of October, according to Office for National Statistics data, which was in line with economist forecasts. Excluding bonuses, pay rose 2.3% during the same period, up by a lesser 10 basis points.

"The wage growth figures should at least provide a bit of reassurance to the MPC," says Andrew Whishart, an economist at Capital Economics.

Real wages, which are salaries adjusted to take account of inflation, fell 0.2% on an annualised basis while, excluding bonuses, salaries slipped by 0.4% during the period. This is the result of inflation running at 3% during the period.

"Admittedly, the comparable measure of underlying (i.e. ex-bonuses) pay growth, which the MPC pays most attention to, recorded a more modest pick up to 2.3% from 2.2%," Wishart adds.

"That said, the single month figure rose to 2.4%. That leaves annual wage growth on track to reach 2.5% in H1 next year as the MPC expects."

Separately, the unemployment rate held steady at 4.3%, its lowest level since 1975, although this was against expectations for a further 10 basis point fall to 4.2%.

On the downside, total employment fell by 56,000 during the three-months to October, a larger movement than the 40,000 drop forecast by economists.

That said, there were 325,000 more people in work than there were in the same period one year ago and 182,000 fewer unemployed.  

Above: Pound-to-Euro shown at hourly intervals.

The Pound was quoted 0.20% higher at 1.3345 against the Dollar at noon while the Pound-to-Euro rate was marked 0.26% higher at 1.1375. Sterling also notched up gains over the Japanese Yen, Swiss Franc and Canadian, New Zealand and Australian Dollars. 

“Signs of wage inflation moving in the right direction would be positive for GBP, not least as it confirms a tight UK labour market and validates the BoE’s tightening bias. We would look for EUR/GBP to move back below the 200-dma level (0.8805) on any positive wage growth surprise,” Viraj Patel, a foreign exchange strategist at the ING Group, wrote in a note ahead of the release.

Above: Euro-to-Pound rate at hourly intervals. Captures break below Moving Average at 0.8805.

Wages, the Bank of England and Interest Rates

A return to real wage growth, where pay packets grow above the rate of inflation, is key for the UK interest rate outlook and therefore, Sterling. 

If the Bank of England is to be able to raise its interest rate much further than the 0.50% level November's hike left it at, then the squeeze on real incomes must ease.

Luckily for Sterling bulls, increasing numbers of economists now see the consumer price index falling over 2018 as the effect of the 2016 fall in the Pound fades.

Wednesday’s data comes closely on the heels of November’s consumer price index reading, which showed headline inflation rising above the 3% threshold for the first time since April 2012.

“The rise in CPI inflation from 3.0% in October to 3.1% in November was the first time since October 2016 that inflation has deviated by more than 1pp from its 2.0% target. But with the impact of the pound’s previous fall set to fade, we think that inflation has reached its peak,” McLaughlin adds.

The Wednesday labour data also comes ahead of the week's European Council summit, which is expected to yield a verdict of "sufficient progress" that enables Brexit talks to move along to the subject of trade, as well as December monetary policy statement from the Bank of England.

“The BOE meeting this week is unlikely to offer much in terms of a policy move given that the central bank raised rates just last month. What has changed dramatically in recent weeks, however, is that Brexit optimism has rapidly faded,” says Samarjit Shankar, head of iFlow and Quant Strategies at BNY Mellon.

Markets will watch the BoE closely for clues around when its next move on interest rates is likely to come. Many may also want to know what, if anything, the Bank thinks of the pending agreement between Prime Minister Theresa May and Brussels over the Brexit negotiations.

"We doubt the BoE will make a big deal of this. Their forecasts assumed a "smooth adjustment" to new post-Brexit trading terms, and the financial market reaction last week was relatively muted," says Robert Wood, a UK economist at Bank of America Merrill Lynch.

"The BoE interest in this is whether growth bounces on relieved uncertainty. We doubt it: uncertainty did not appear to have heavily weighed on growth this year, so relieving it probably won't provide much of a boost."

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