The Pound Sterling (GBP) exchange rate made gains against the Euro (EUR), US Dollar (USD) and Swiss Franc (CHF) on Wednesday following the publication of data, which showed that UK wage growth outpaced in inflation for the first time in five years.
The increase in wage growth took economists by surprise and raises the prospect that wages across the UK could soon begin to finally see some improvement.
The data showed that Average earnings excluding bonuses increased by 1.3% in September, beating forecasts for a rise of 1.1% and was better than the previous figure of 0.9%. Earnings including bonuses meanwhile also improved more than expected as they rose by 1% from 0.7% and beat expectations for a figure of 0.8%.
Bank of England policy makers have repeatedly cited weak wage growth as one of the major reasons for them to vote in favour of leaving interest rates at the record low level of 0.5%. With Wednesday’s data showing that wages are finally seeing some movement upward, economists could raise their bets that next month’s BoE policy meeting could see policy makers’ shift in their stance towards rate rises.
A separate report meanwhile showed that the UK’s unemployment rate remained unchanged at 6% despite the number of people out of work falling by 115,000 between July and September. The number of people claiming unemployment benefits was 931,700 in October, 20,400 down on September, and marked a 24th consecutive monthly cut.
Sterling will likely experience further movement when the Bank of England delivers its latest Inflation Report. Economists are forecasting that the bank will downgrade its growth forecasts and deliver a dovish report on the state of the economy. Despite that, traders believe that the report will show that the UK continues to be the best performing G-7 economy.
Pound Sterling Exchange Rate Gives Up Earlier Gains
The Pound went onto the retreat against the Euro and US Dollar as well as falling against other major peers after the Bank of England Inflation report showed that policy makers cut growth forecasts for the UK economy and said that inflation is likely to fall below 1% over the coming months and interest rates are unlikely to rise until late next year.
The BoE now forecasts that the UK economy will see expansion of 2.9% in 2015 and 2.6% in 2016. That’s down from 3.1% and 2.8% in August. BoE policy makers highlighted the weakness of the Eurozone as a major drag on growth prospects as UK exports weaken.
Pound Sterling Exchange Rate in free-fall on BoE Report
The Pound declined sharply against all of its major peers including the Euro, US Dollar, Australian Dollar and Swiss Franc following the Bank of England’s inflation report. The UK central bank warned that the nation could see inflation fall below 1% over the next few months as weakness in the Eurozone and wider global economy weighs upon consumer prices.
The report also showed that the BoE cut its growth forecasts for the next two years and said that interest rates are not expected to rise until later in 2015.
In a news conference at the Bank of England, Governor Mark Carney said that it was likely he would soon have to write a letter to the Chancellor, George Osborne, explaining why inflation had dropped below 1%. That news spooked the markets and led to a hefty selling off of the Pound.
Sterling fell to yearly lows against a number of major peers including the US Dollar. More losses are forecast.
On Thursday the Pound continued to weaken against its major peers as the BoE’s inflation report continued to weigh on the currency. A lack of UK data releases means that the Pound is likely to end the week lower against the Euro, US Dollar and other currencies.
On Friday the Pound slipped back to the 1.25 level against the Euro and the 1.56 level against the US Dollar. Positive Eurozone GDP data and US Retail Sales data will likely send the Euro and US Dollar pushing higher against the embattled Pound exchange rate.
As well as continuing to be weakened by the Bank of England Report the Pound came under more pressure from a report published by the Office for National Statistics, which said that U.K. construction output rose by 1.8% in September, below expectations for an increase of 3.7%. Construction activity for August was revised to a 3.0% decline from a previously estimated 3.9% drop.
