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Pound Sterling slides as softening UK wage growth eases inflation outlook

Republished By Plato
Republished By Plato

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  • The Pound Sterling faces a sell-off after the release of lower-than-expected UK wage growth in the quarter to November.
  • Employment levels remain steady despite increasing economic headwinds.
  • Risk-off market mood, UK inflation data could keep the Pound Sterling under pressure.

The Pound Sterling (GBP) falls sharply on Tuesday’s European morning session as the United Kingdom Office for National Statistics (ONS) reported a sharp slowdown in the Average Earnings data for three months ending November. The labor market remained steady in this period despite vulnerable economic conditions in the domestic and overseas markets. A softer-than-projected wage growth is expected to convince investors more about early rate cuts from the Bank of England (BoE).

The UK economy is exposed to a technical recession as the ONS reported a contraction in the third quarter of 2023. The BoE is also less confident about any growth in the final quarter of 2023 due to higher interest rates and a deepening cost-of-living crisis. Now, a softer inflation outlook, along with fears of further economic pain, could allow BoE policymakers to roll back their tight interest rate stance.

The GBP/USD pair has faced a significant correction as the deepening crisis in the Middle East region has increased the appeal for safe-haven assets. The US Dollar Index (DXY) has refreshed its weekly high ahead of the US Retail Sales data, which will provide more cues about the timeframe in which the Federal Reserve (Fed) could plan the rate-cut cycle.

Daily digest market movers: Pound Sterling falls amid risk-off mood

  • The Pound Sterling has printed a fresh weekly low near 1.2660 as the ONS reported steady job market figures and softening labor costs in the three months ending November.
  • In this period, the Unemployment Rate remained unchanged at 4.2%, as anticipated by the market participants.
  • The UK employers hired 73K job-seekers in November, a figure significantly higher than the 50K jobs added in the three months to October.
  • Individuals claiming jobless benefits rose sharply to 11.7K in December against a slight increase of 0.6K in November.
  • Average Earnings excluding bonuses decelerated to 6.6%, as expected by market participants, against 7.2% growth in the quarter to October. Earnings data including bonuses grew at a slower pace of 6.5% against the consensus of 6.8% and the prior reading of 7.2%.
  • High wage growth has remained a major driving factor contributing to price pressures and robust consumer spending in the UK.
  • A sharp decline in UK wage growth is expected to weaken arguments of those officials of the Bank of England who support elevated interest rates for a longer period.
  • The BoE could discuss early rate cuts as the economy is on the brink of a technical recession after GDP contracted in the third quarter of 2023.
  • After the UK labor market data, investors will focus on the inflation data for December, which will be released on Wednesday. Further softening of the UK inflation data would strengthen the case of early rate cuts by the BoE.
  • Meanwhile, the market mood remains downbeat as the Middle East crisis has deepened. Iran-backed-Houthis have threatened to retaliate for airstrikes from the United States and the UK in Yemen.
  • The US Dollar Index (DXY) has printed a fresh weekly high near 103.00 as optimism for early rate cuts by the Federal Reserve persists. Investors await fresh cues about when the Fed will start unwinding its restrictive monetary policy stance.
  • This week, monthly US Retail Sales data for December and the Fed’s Beige Book will be in focus. An upbeat Retail Sales data would allow Fed policymakers to maintain interest rates at the current levels until June.

Technical Analysis: Pound Sterling declines toward 1.2600

The Pound Sterling witnessed a steep fall after a strong breakdown of the rising channel chart pattern formed on an hourly timeframe. The near-term appeal has dampened as the Cable has slipped below the 200-period Exponential Moving Average (EMA). The Cable is expected to find intermediate support around 1.2612, the low from December 13.

The 14-period Relative Strength Index (RSI) has shifted into the 20.00-40.00 range, indicating bearish momentum has been triggered.

The broader appeal for the GBP/USD has also been impacted significantly as the pair has dropped below the 20-day EMA, which trades around 1.2700.

Pound Sterling FAQs

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data.
Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates.
When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP.
A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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