Sterling edged lower on Tuesday after data showed that growth in British wages was slightly weaker than expected but failed to affect bets on the Bank of England policy path.
Wages grew at their slowest pace since October 2022 while the unemployment rate edged up unexpectedly, according to data which may slightly ease the Bank of England’s inflation worries.
Money markets fully price a 25 basis points rate cut from the BoE by August and an around 50% chance by June.
Sterling climbs to highest since August with Fed, ECB cuts weighing
Sterling was last down 0.1% at $1.2798 after jumping 1.6% last week versus the greenback as investors bet that the BoE will be slower than the European Central Bank and U.S. Federal Reserve in cutting interest rates.
Last week, the dollar and euro were under selling pressure versus sterling after Fed Chair Jerome Powell sounded more confident about cutting interest rates in coming months, while the ECB’s governing council had begun to discuss a suitable timeline for monetary policy easing.
Some analysts argued that investors tried to shorten sterling in recent months on the back of deteriorating data and weak external balances. Still, the pound has outperformed this year, supported by its high-yielding currency status on top of a broad risk appetite.
Investors will focus on U.S. inflation data later in the session which could affect market expectations for the Fed future decisions.
“Since this (wage figures) is published as a moving average, a big base effect should add pressure in the next couple of months and push it below 6.0%, according to our economist,” said Francesco Pesole, rate strategist at ING.
Investors will look at UK inflation data next week, with some analysts warning that while figures could be close to the BoE target, underlying pressures are still in place.
“By a quirk of base effects, the April energy price cap reduction might mean UK inflation beats the euro zone in the race to return to target,” said Mark Capleton, strategist at BofA. “The UK’s underlying inflation picture is considerably less benign.”
Capleton argued that “the UK ‘had to wave a bigger stick’ than its peers, needing much higher average policy rates.”
The euro was up 0.2% at 85.46 pence.
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