Pound Sterling Eases Against Euro, Dollar After Wage Data Undershoots Expectations

PoundSterlingLIVE – The British Pound dipped as an initial reaction to news UK wages cooled in October, but downside risks to the currency are limited as these data are unlikely to shift the on Thursday.

, rose 7.2% in October said the ONS, well below the expected 7.7%. Countering the downside surprise was news the September figure was revised higher to an eye-watering 8.0%.

rose 7.3%, which is shy of the 7.4% expected by markets and lower than September’s 7.8%, which was also revised higher.

Wages are a key component of domestic inflation, and the Bank of England judges that at current levels, they remain too high to be consistent with a fall in inflation back to the 2.0% target.

Although the drop in wage increases will be a welcome development, these data are unlikely to prevent the Bank from warning on Thursday that interest rates must stay at 5.2% for an extended period.

It is this messaging – of a higher-for-longer rate stance – that helped the Pound outperform through the course of November.

The exchange rate slid to 1.1653 as an initial reaction to the release before recovering to 1.1670, which ensures it is still higher on the day.

The exchange rate also dipped before regaining composure to quote at 1.2579 at the time of writing.

“Policymakers are expected to stress that rates will need to remain in restrictive territory for some time,” says Jake Finney, economist at PwC UK. “Despite slower pay growth, inflation-adjusted pay is still growing on a year-on-year basis. This is because headline inflation is falling back at a faster rate.”

PwC’s modelling indicates that the worst of the living standards squeeze is over for the average household.

The odds of the Bank of England turning more ‘hawkish’ in its communication on Thursday are low as these wage data suggest that a looser labour market is starting to translate into slower pay growth.

Between September and October, average pay with bonuses included has declined by 1.6%, compared to an average month-on-month growth rate of 1.1% in the first six months of this year.

The Bank will feel it is on course to lower inflation but will want to see further downshift in wage pressures before considering interest rate cuts.

An original version of this article can be viewed at Pound Sterling Live