Negative Real Wage Growth Weighs on Sterling
Negative real wage growth overshadowed the latest fall in British unemployment yesterday and led to a pullback in demand for the Pound.
The headline UK unemployment rate fell unexpectedly from 4.4% to a new 42-year low of 4.3% in July, it was reported yesterday. The latest dip in joblessness represented a jobs gain of 181,000 in the three months to July.
However, the bigger picture revealed an environment of negative real wage growth, with a 2.1% uptick in average earnings completely swallowed by a 2.6% rise in consumer prices in July.
The fact that CPI recently went on to strike a joint-four-year high of 2.9% in August suggests that consumer are set to feel the pinch over the coming months.
Demand for Sterling cooled significantly following the employment report as traders estimated that weak wage growth would ultimately prevent the Bank of England (BoE) from raising interest rates during today’s meeting.
Pound to Euro Exchange Rate Could Rally on Hawkish BoE Statement
The Pound to Euro exchange rate weakened slightly yesterday morning (but managed to recover by the end of the London session) following the news of a -0.5% drop in British real wage growth during July.
The figure caused some traders to bet against any near-term rate rises from the BoE, however, others believe that the UK central bank could use today’s meeting to prime markets for higher rates in the future.
With UK CPI recently rising to 2.9% – significantly higher than the BoE’s 2.0% target – and British unemployment running at a 42-year low of 4.3%, there is considerable ammunition for officials at Threadneedle Street to start tightening monetary policy.
However, the spectre of an ambiguous British exit from the European Union continues to weigh on economic sentiment; this mixed with falling real wages presents a compelling argument for the bank to hold steady.
The bank is unlikely to announce any radical measures during today’s communiqué but there is potential for Governor Mark Carney to raise the possibility of a rate hike at November’s ‘Super Thursday’ meeting when policymakers will release their latest forecasts for UK growth and inflation.
Any hint of a November hike could breathe life into Sterling pairs, while a cautionary statement devoid of rate hike hints could send the Pound lower across the board.
Pound to US Dollar Exchange Rate Climbs Down From 1-Year High Following UK Wage Data
‘Cable’ suffered losses of around -100 pips yesterday, sparked by the morning’s disappointing UK wage figures, which came in -0.2% lower-than-anticipated and -0.5% lower than the equivalent CPI score for July. The depreciation took the Pound to US Dollar exchange rate down the ladder from a one-year high.
GBP/USD trading momentum is likely to be dictated by the BoE’s policy statement today, although a US consumer price index report could also have an impact, albeit less pronounced.
Pound to Canadian Dollar Exchange Rate Loses Half a Cent
Sterling lost out on around half a cent to the Canadian Dollar yesterday as disappointing wage figures weighed on the Pound and rising oil prices benefitted the ‘Loonie’.
Oil rallied after the International Energy Agency said that the global oil surplus was starting to shrink due to the drop in output from major producers and an increase in general demand.
The Canadian Dollar also benefitted from recent comments made by finance minister Bill Morneau, who said that he could live with a more robust currency.
Pound to Australian Dollar Exchange Rate Poised for Big Moves Following BoE Statement
The Pound to Australian Dollar exchange rate softened by around a third of a cent yesterday due to concerns over the probability that the BoE will raise rates while UK wage growth continues to be outpaced by rises in consumer prices.
GBP/AUD could easily surge this afternoon if the UK central bank strikes a hawkish tone at its latest policy announcement, however, a dovish message could send Sterling reeling.
Pound to New Zealand Dollar Exchange Rate Touches New 4-Month High
The Pound to New Zealand Dollar exchange rate touched a new four-month high yesterday but demand for the UK currency was dampened by the latest British employment report.
GBP/NZD could strike new highs this afternoon if rate hike bets are boosted by BoE Governor Mark Carney’s latest statement, but a cautionary message could see the pair slump lower.
Data Released Today
12:00 GBP Bank of England Rate Decision (SEP 14) 0.25%
12:00 GBP BOE Asset Purchase Target (SEP) 435b
13:30 USD Consumer Price Index (YoY) (AUG) 1.8%