Pound Slips on Disappointing Earnings Data
The British Pound fell against its major rivals on Wednesday, February 15 after it was shown that UK companies are not raising pay rates to the extent economists were expecting.
Latest labour market data from the ONS shows that the Average Earnings Index, with bonuses included, rose at 2.6% in December.
Economists had forecast a rise of 2.8%, in line with the previous month’s reading.
The Pound slipped against all major G10 currencies on the miss as the data suggests the Bank of England will be in no mood to raise interest rates in light of the setback in earnings.
Other data in the release were good though with the unemployment rate staying steady at multi-year lows at 4.8% and the amount of people seeking benefits falling an impressive 42.4K.
The economy is therefore creating work, but there is a large enough pool of candidates out there to ensure that pay rises remain subdued.
Only when a labour shortage is seen will pay packets start rising, and only then will the Bank of England consider raising interest rates… and only then will the Pound find the upward support from interest rates it requires to stage a meaningful recovery.
This is the dynamic that is currently in play at present.
"The markets are focusing on wage data as it will be a key driver of monetary policy this year. If wage growth rises sharply then central banks should hike interest rates at a faster clip than currently expected. However, today’s weaker wage data could take the pressure off the BoE, hence the decline in UK bond yields this morning, which has also weighed on the Pound," says Kathleen Brooks at City Index in London.
Of course, there is also a chance that companies are using Brexit to justify not paying workers more and with years of negotiations ahead this situation may not change.
This adds to the sense that Sterling is likely to struggle going forward.
Pound Sterling fell in the wake of below-expectation inflation data on Tuesday February 14 as the currency now appears more reactive to data and Bank of England interest rate expectations than it has for some time now and not just driven by utterances made by politicians regarding Brexit.