**UK Wage Growth Expected to Ease, Pound Steady**
*By Kenny Fisher, MarketPulse*
The British pound has been trading steadily against major currencies as market participants await the latest UK wage growth data. With persistent inflationary pressures and economic challenges facing the United Kingdom, the upcoming wage numbers are expected to provide important signals for both the Bank of England (BoE) and currency traders. A softer read on wage growth could signal a turning point in the central bank’s monetary policy stance, with potential implications for the trajectory of the GBP.
### The State of the Pound
– The pound has exhibited relative stability, supported by cautious optimism that the UK economy may avoid a deeper contraction despite persistent headwinds.
– As of early Tuesday, GBP/USD was hovering near the 1.27 level, showing limited volatility ahead of the key wage announcements.
– Currency traders have adopted a wait-and-see approach, factoring in the interplay between tight labor market data and the future interest rate path of the BoE.
### Why Wage Growth Data Matters
Wage growth is one of the most watched metrics this year for several reasons:
– The BoE has focused on wage data as a key determinant in its efforts to control inflation.
– Rising wages have had a direct influence on core inflation, keeping price pressures elevated even as energy and goods inflation cools.
– Strong wage growth has complicated the BoE’s fight to bring consumer price inflation back to its 2% target.
### Recent Wage Growth Trends
– The UK has seen robust wage growth in recent months. Average earnings including bonuses rose 5.9% in the three months to April on a yearly basis, data from the Office for National Statistics (ONS) shows.
– However, this marks a deceleration from the previous 6% reading, suggesting some easing in pay pressures.
– Excluding bonuses, regular pay growth has also shown signs of moderation but remains elevated by historical standards.
### Economic and Policy Context
The latest wage numbers arrive against a backdrop of:
– Headline inflation falling to 2.3% in April, the lowest since 2021.
– The BoE holding its benchmark rate at a 16-year high of 5.25% at its last meeting, citing concerns that sticky wage growth and services inflation could keep price pressures high.
– A still-tight UK labor market, although recent indicators point towards cooling demand as unemployment edges up and vacancies gradually decline.
### What Economists Are Forecasting
Consensus among economists surveyed by Reuters and Bloomberg suggests:
– Average earnings, including bonuses, are likely to have increased by around 5.7% in the three months to May, down slightly from previous readings.
– Regular pay growth (excluding bonuses) is also expected to moderate, but remain well above the 3-4% annual pace historically considered consistent with the BoE’s inflation target.
### The Bank of England’s Balancing Act
BoE officials have made it clear that the path of wage growth will be integral to their decision-making process. Key considerations include:
– **Inflation Target:** Wage growth above 5% risks fueling services inflation, which is already proving stubborn.
– **Interest Rate Policy:** If wage pressures persist, the BoE may delay rate cuts, keeping borrowing costs higher for longer.
– **Labour Market:** Any surprise sharp slowdown in pay growth could bolster the case for an earlier rate cut, especially as job market softens.
### Market Reaction and Scenario Analysis
Traders are braced for heightened volatility depending on how the data compares to expectations. Possible outcomes include:
#### If Wage Growth Eases More Than Expected
– The pound could face modest selling pressure as rate cut expectations are brought forward.
– Expectations of additional monetary loosening in the second half of 2024 could be reinforced.
– Short-term UK bond yields might drop, reflecting a greater likelihood of early easing.
#### If Wage Growth Surprises on the Upside
– The pound may strengthen as investors push back
Read more on GBP/USD trading.