Pound US Dollar (GBP/USD) Exchange Rate Slips as Weak Wage Growth Fuels BoE Cut Odds

Disappointing UK Wage Growth Drags Pound Sterling US Dollar (GBP/USD) Exchange Rate Lower

A surprise easing in UK wage growth saw the Pound Sterling to US Dollar (GBP/USD) exchange rate stumble this morning as the risk of future Bank of England (BoE) dovishness picked up.

With growth in average weekly earnings unexpectedly dipping from 3.8% to 3.6% the case for lower interest rates appeared to increase.

The decline was also accompanied by underwhelming labour market data, which saw the largest quarterly drop in job vacancies since 2009.

Commenting on the data, Tej Parikh, chief economist at the Institute of Directors, noted:

‘Many firms are also putting recruitment plans on ice as wider projects and investments are bottled up by uncertainty. Vacancies are likely to continue falling.’

As the labour market appears to be struggling to tighten further in the face of ongoing Brexit-based uncertainty and political anxiety confidence in the underlying health of the UK economy diminished.

US-China Trade Doubts Support US Dollar Exchange Rates

Growing doubts over the likelihood of an imminent breakthrough in US-China trade relations helped to keep the US Dollar (USD) on a positive footing, meanwhile.

However, with the Trump administration widely expected to postpone its previously-announced tariffs on EU car exports a renewed sense of market risk appetite could drag on USD exchange rates this afternoon.

On the other hand, as forecasts point towards a solid uptick in October’s NFIB small business optimism index the US Dollar could find fresh support.

As long as businesses show signs of shrugging off the long-running sense of trade anxiety that has hung over the US economy this year the GBP/USD exchange rate is likely to remain on the back foot.

Falling UK Consumer Price Index Forecast to Boost Case for BoE Rate Cut

Fresh volatility looks likely for GBP exchange rates on the back of Wednesday’s UK consumer price index as markets anticipate a dip in the headline inflation rate.

If the consumer price index eases from 1.7% to 1.6% on the year this would offer further weight to arguments for the BoE to cut interest rates in the months ahead.

Unless inflationary pressure shows signs of picking back up towards the BoE’s 2% target the rising odds of a 2020 interest rate cut are likely to drag on the Pound.

With the monthly inflation rate also forecast to show a -0.1% contraction the GBP/USD exchange rate may struggle to find support tomorrow.

Muted US Inflation Signs Set to Limit GBP/USD Exchange Rate Downside

Even so, the release of October’s US consumer price index report may help to limit any of the GBP/USD exchange rate’s downside potential.

Although the CPI is not the Federal Reserve’s preferred gauge of inflation any weakness here could still bolster the likelihood of policymakers taking a dovish stance.

The latest commentary from Fed Chair Jerome Powell could also put pressure on the US Dollar if he shows any signs of caution over the economic outlook.

However, if Powell signals a sense of cautious optimism in the health of the US economy this may encourage USD exchange rates to gain fresh ground across the board.

Louisa Heath

Contact Louisa Heath