The British pound advanced against the US dollar on Tuesday, driven by data revealing a historic surge in UK wages during the second quarter, intensifying the Bank of England‘s concerns over inflation. However, gains were constrained by signs of a cooling labor market.
Excluding bonuses, wages were 7.8% higher compared to the previous year in the three months ending in June, marking the fastest annual growth rate since comparable records commenced in 2001, as reported by the Office for National Statistics.
Economists surveyed by Reuters had anticipated a 7.4% increase.
Nevertheless, the data also unveiled signs of a labor market slowdown, with the unexpected rise in the unemployment rate from 4% to 4.2%. This rate is the highest since the three months leading up to October 2021, surpassing the Bank of England’s projections.
Adam Cole, Chief Currency Strategist at RBC Capital Markets, stated, “It was the proverbial mixed bag with some weaker activity data but still no signs that weaker activity is starting to weigh on earnings growth.”
The pound appreciated by 0.3% against the dollar, reaching $1.2723. However, its value against the euro remained relatively stable, with the euro purchasing 85.97 pence.
The dollar index, gauging the currency’s performance against six peers, including the pound and euro, declined by 0.2%.
Money market traders have now fully priced in a 25 basis point increase from the Bank of England at its September meeting. Additionally, there’s around a 12% probability of a 50 basis point rate hike.
Traders have also factored in a cumulative 75 basis points tightening from the central bank by March of next year, potentially pushing the bank rate to 6%. These expectations stem from concerns that elevated pay growth could further drive up prices down the line.
Emma Wilks, UK Economist at Lloyds Banking Group, commented, “Wage growth in June accelerated… reinforcing concerns that second-round inflationary effects have crystalized.”
Wilks added, “The upside surprise in pay growth adds to concerns of persistent price pressures,” indicating an anticipated 25 basis point hike in September.
Although Bank of England Governor Andrew Bailey acknowledged this month that the rate of pay growth exceeded the central bank’s forecasts, the bank also hinted that it was nearing a pause in its streak of interest rate hikes.
The upcoming focal point for the Bank of England is the inflation data for July. Official data expected to be disclosed on Wednesday suggests that consumer prices likely moderated further last month.
