UK Wage Data Provides Some Relief Ahead of CPI Report
On the start of the European trading session, brought forth significant economic data, with the spotlight on the latest labour market report from the UK. This report has unveiled some encouraging news for the Bank of England (BoE) as it indicates a moderation in the pace of average weekly earnings growth. In August, this growth subsided to 8.1% on a 3-month average, year-over-year basis, down from the peak of 8.5% registered in July. This development tentatively suggests that wage growth may be reaching its zenith, although it remains uncomfortably high.
Upon a closer examination of the details, it becomes evident that the expansion in average weekly earnings has decelerated over the past six months. In August, it advanced at an annualized rate of 6.6%, compared to 6.9% in the preceding six-month period. A similar marginal slowdown is discernible in the AWE regular pay measure, which excludes the influence of more volatile bonus payments. AWE regular pay increased at an annualized rate of 7.4% over the six months ending in August, as opposed to 7.6% in the previous six-month period.
The BoE has recently expressed difficulty in reconciling the trajectory of AWE with other indicators of wage growth. Most of these indicators have exhibited more stable growth rates, although still elevated, but not quite as high as the AWE series. The BoE has noted that its agents have consistently reported average annual pay settlements in the range of 6.0% to 6.5%, with the expectation that settlements will begin to decline. This difference in wage growth was one of the key reasons the BoE refrained from further interest rate hikes during their last meeting in September, even though AWE surprised with its upward movement in July.
The softer AWE reading for August is expected to align with market expectations, suggesting that the BoE will maintain interest rates at their current level in the upcoming Monetary Policy Committee (MPC) meeting on November 2nd. As of now, the UK rate market is factoring in only a minimal increase of approximately 6 basis points by the December MPC meeting, totalling 11 basis points. This indicates that market participants are not yet fully confident that the BoE's tightening cycle has come to an end. However, for expectations of the BoE staying on hold to be shaken, it would likely require a significant upward surprise in inflation as reported in the Consumer Price Index (CPI) for September, due to be released today.
I anticipate that the CPI report will reveal further evidence of easing inflation pressures. A milder CPI reading could exert downward pressure on the pound, pushing it towards the lower boundaries of its recent trading ranges against both the EUR and GBP. Throughout this month, the pound has largely remained in a consolidation phase, trading within the confines of 1.2000 to 1.2400 against the US dollar (cable) and within a narrow range spanning from 0.8600 to 0.8700 against the euro (EUR/GBP).
My final target for GBPUSD would be at 1.20500 and then 1.18000.
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