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As a Result of a Slowdown in Wage Growth in the United Kingdom, the Pound Sterling Is Falling

Leon Kramer

ByLeon Kramer

Jan 18, 2024
As a Result of a Slowdown in Wage Growth in the United Kingdom, the Pound Sterling Is Falling

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  • The Pound Sterling is expected to experience a decline following the announcement of UK wage growth figures for the quarter ending in November, which fell below expectations.
  • Employment levels hold steady amidst growing economic challenges.
  • The Pound Sterling may face continued pressure due to the risk-off market sentiment and the release of UK inflation data.

The Pound Sterling (GBP) experienced a significant decline during Tuesday’s European morning session due to the United Kingdom Office for National Statistics (ONS) reporting a notable deceleration in the Average Earnings data for the three months ending in November.

The labor market remained stable during this period despite the challenging economic conditions both domestically and internationally. Investors are likely to be more convinced about early rate cuts from the Bank of England (BoE) due to wage growth that is softer than projected.

The UK economy is at risk of entering a technical recession following the ONS’s report of a contraction in the third quarter of 2023. The BoE has expressed concerns about the potential impact of higher interest rates and a worsening cost-of-living crisis on any growth in the final quarter of 2023.

Now, a more subdued inflation outlook, coupled with concerns about additional economic hardship, may provide an opportunity for BoE policymakers to ease their strict interest rate stance.

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The GBP/USD pair has experienced a notable correction due to the escalating crisis in the Middle East, which has heightened the demand for safe-haven assets. The US Dollar Index (DXY) has reached its highest point of the week in anticipation of the US Retail Sales data.

This data will give us more insight into when the Federal Reserve (Fed) might consider implementing a rate-cut cycle.

Pound Sterling Continues to Face Potential Risks as the UK Awaits the Release of Inflation Data

  • The Pound Sterling has reached a new weekly low of around 1.2660 due to the ONS reporting stable job market figures and decreasing labor costs in the three months ending November.
  • The Unemployment Rate held steady at 4.2% during this period, in line with market expectations.
  • In November, UK employers hired 73K job-seekers, which is a notable increase compared to the 50K jobs added in the three months leading up to October.
  • The number of individuals claiming jobless benefits saw a significant increase in December, rising to 11.7K. This is in contrast to the slight increase of 0.6K observed in November.
  • Earnings excluding bonuses slowed down to 6.6%, in line with market expectations, compared to a growth of 7.2% in the previous quarter until October. The growth rate of earnings data, which includes bonuses, was slightly lower than expected at 6.5%, compared to the consensus forecast of 6.8% and the previous reading of 7.2%.
  • Strong wage growth continues to play a significant role in fueling price pressures and supporting strong consumer spending in the UK.
  • The anticipated decrease in wage growth in the UK is likely to undermine the arguments of Bank of England officials who advocate for maintaining higher interest rates for an extended period.
  • The BoE may consider discussing potential rate cuts due to the precarious state of the economy, which experienced a contraction in GDP during the third quarter of 2023.
  • Following the release of the UK labor market data, investors will be closely monitoring the inflation data for December, which is set to be unveiled on Wednesday. If the UK inflation data continues to soften, it could provide more support for the BoE’s argument to implement rate cuts sooner rather than later.
  • Meanwhile, the market sentiment continues to be damaging as the situation in the Middle East worsens. Supported by Iran, Houthis have issued a warning of potential retaliation in response to recent airstrikes conducted by the United States and the UK in Yemen.
  • The US Dollar Index (DXY) has reached a new weekly high of around 103.00, fueled by ongoing optimism for potential rate cuts by the Federal Reserve. Investors are eagerly anticipating updates on the timing of the Fed’s decision to begin easing its tight monetary policy.
  • The focus this week will be on the monthly US Retail Sales data for December and the Fed’s Beige Book. If Retail Sales data remains positive, it could give Fed policymakers the confidence to keep interest rates steady until June.

Pound Sterling Is Closely Monitoring the Support Level Around 1.2630

The Pound Sterling experienced a significant decline following a sharp breakdown of the ascending channel chart pattern that developed over an hourly timeframe.

The recent allure has diminished as the Cable has fallen below the 200-period Exponential Moving Average (EMA). There is anticipated intermediate support for the Cable around 1.2612, which was low from December 13.

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Leon Kramer

Leon Kramer

Leon Kramer, a renowned financial author, enlightens Main Forex News readers with his deep understanding of currency markets. His years in global finance, combined with an intuitive grasp of trends, delivers insightful, up-to-the-minute foreign exchange analysis.

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