Pound US Dollar (GBP/USD) Exchange Rate Narrows as UK Wage Growth Surprises
The Pound US Dollar (GBP/USD) exchange rate is rangebound this morning, as the UK saw a surprise uptick in wage growth.
At the time of writing, GBP/USD is trading at around US$1.2222, showing little movement from the morning’s opening rates.
Pound (GBP) Supported by Boosted Wage Growth
The Pound (GBP) is on firm footing today, as the latest wage growth figures printed above forecast. In tandem with robust jobs data, the pressure is being kept on the Bank of England (BoE) to control inflation.
November’s average earnings data printed at 6.4%, above the forecast of 6.2%. This may have sparked further rate hike bets among investors, as it remained below inflation. Adjusted for CPI, this means that total pay had fallen by 3.9%, the largest fall since 2009.
Furthermore, the UK’s unemployment rate for November managed to hold at 3.7%, keeping close to previous 50-year lows. With BoE Governor Andrew Bailey pointing to a tight labour market as maintaining high inflation, this may leave room for further tightening.
However, Sterling may be being capped by a lack of comment from BoE policymakers. As such, analysts are less optimistic than investors over further rate hikes. Samuel Tombs, an Economist at Pantheon Macroeconomics stated:
‘We think they will be willing to make that call – to carrying on hiking would bring its own risks – though the lack of commentary from MPC members over the last month is disconcerting.’
Furthermore, the current risk-off market mood may be tempering the increasingly risk-sensitive Sterling.
US Dollar (USD) Lifted by Risk Averse Trade
The US Dollar (USD) is making gains against most other peers this morning, as a risk averse mood covers the session.
Due to the ‘Greenback’s safe-haven nature, the cautious mood is bringing support to the world’s largest economy.
The mood may have been sparked by worries over China’s economic growth. While this morning’s GDP data exceeded expectations and showed a Q4 growth of 2.9%, it was a drastic slowdown from Q3. The official target from China was around 5.5%, meaning growth fell far short, and was the worst level since 1976.
Louise Loo, a Senior Economist at Oxford Economics, explored this further stating:
‘Activity data in December surprised broadly to the upside, but remains weak, particularly across demand-side segments such as retail spending.’
Elsewhere, pessimism from the World Economic Forum about the global outlook could be providing further safe-haven flows.
Pound US Dollar (GBP/USD) Exchange Rate Forecast: UK Inflation to Keep BoE Under Pressure?
Looking ahead for the Pound (GBP), tomorrow’s inflation data for December takes the spotlight. With a forecast for headline inflation to fall from 10.7% to 10.5%, a further deviation downwards could weaken Sterling.
However, the pressure is firmly on the Bank of England (BoE) to control inflation. Should the data prints as forecast, by remaining over five times the BoE’s target, rate hike bets could remain strong. As such, the Pound (GBP) could strengthen.
For the US Dollar (USD), December’s PPI data and retail sales data is due to print tomorrow. Both sets are forecast to show a fall, with PPI falling from 0.3% to -0.1% and retail sales expected to fall from -0.6% to -0.8%.
Due to the US economy’s consumption based nature, the fall in retail sales may weaken the ‘Greenback’. This could then be compounded by the PPI drop, which may pare back rate hike expectations among investors.