Pound Sterling US Dollar (GBP/USD) Exchange Rate Benefits as UK Wages Beat Forecast
An unexpected uptick in UK average weekly earnings encouraged the Pound Sterling to US Dollar (GBP/USD) exchange rate to claw back some ground.
Basic pay saw a sharp increase of 3.1% in the three months to August, suggesting that the tightening labour market is helping to fuel higher earnings for workers.
While inflation of 2.7% in August means that wage growth was not quite as strong as it could have been this was not enough to weigh down Pound Sterling (GBP) on Tuesday morning.
As Philip Smeaton, Chief Investment Officer at Sanlam UK, commented:
‘Wages keep on going from strength to strength, as competition for workers is finally feeding through to pay. The Bank of England will be keeping a watchful eye on any upwards pressure this puts on inflation, but it should also help support the consumer and their ability to handle higher interest rates should bank need to increase interest rates.’
This positive showing helped to limit the impact of ongoing Brexit-based uncertainty, even as the chances of an imminent deal appeared to diminish further.
Even so, GBP exchange rates remain vulnerable to a reversal ahead of the week’s critical EU summit, especially if rhetoric continues to harden.
Falling UK Inflation Rate Forecast to Add to GBP/USD Exchange Rate Gains
As forecasts point towards an easing in September’s UK consumer price index the mood towards the Pound could improve further on Wednesday.
If annual inflation slows from 2.7% to 2.6% this would bode well for domestic wage growth, indicating that workers could see further gains in the months ahead.
A weakening in price pressures would undermine the case for the Bank of England (BoE) to raise interest rates again in the near future, however.
With the BoE looking set to remain on hold for some time to come this could limit the upside potential of GBP exchange rates.
Although the prospect of higher wage growth, and its positive impact on consumer spending, could drive the Pound higher any gains could prove fragile.
Any negative Brexit developments may easily outweigh encouraging UK inflation data in the near term.
Hawkish Fed Minutes Set to Boost US Dollar (USD) Exchange Rates
Demand for the US Dollar (USD) may pick back up, meanwhile, with the release of the Federal Open Market Committee’s (FOMC) latest meeting minutes.
Confirmation that policymakers maintained a generally hawkish outlook at the September policy meeting could set USD exchange rates on a renewed uptrend.
As long as signs point towards the Federal Reserve raising interest rates again before the end of the year the appeal of the US Dollar is likely to improve once again.
On the other hand, evidence of increased caution within the FOMC may give the GBP/USD exchange rate a boost.
Further signs of tightening within the US labour market could also offer support to the US Dollar, with the latest jobless claims figures expected to show an improvement on the week.
The US Dollar could equally benefit from an elevated sense of market risk aversion if global trade tensions fail to ease in the days ahead.
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