The pound sterling gained against the euro on Tuesday morning as latest data from the UK showed wage growth at a two-year low.
Pay excluding bonuses grew 5.4% year-on-year between April and June in the UK, marking the lowest rate in two years, according to data from the Office for National Statistics.
Meanwhile, the unemployment rate fell to 4.2% from 4.4% in the three months up to July. The ONS also noted that the estimated number of vacancies in the UK decreased in May to July 2024 by 26,000 on the quarter to 884,000.
Following the update, the pound was 0.3% higher against the euro at 1.1722 and also traded up 0.28% against the US dollar at 1.280.
What implications for the Bank of England’s next rate decision?
Kyle Chapman, FX markets analyst at Ballinger Group, said there are a lot of mixed signals in the latest ONS report and therefore the implications for the Bank of England are not clear.
“Decelerating wage growth bodes well for further interest rate cuts towards the end of this year, but it’s the dramatic undershoot in unemployment that has caught the market’s attention and it’s being traded broadly as a hawkish report. It was enough for the ONS to drop the line about the labour market continuing to gradually cool.
“The issue, of course, is that you cannot take the Labour Force Survey as gospel, because sampling issues are causing unusually high volatility. It’s not a signal you can rely on from a single data point. I would not take this as a sign of things going backwards just yet, although if it turns into a meaningful trend that can be evidenced elsewhere, then that could continue to place upward pressure on inflation. Traders and policymakers will now look for clarity from tomorrow’s services inflation print,” Chapman added.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, also commented on the ONS data.
“The good news for households is that pay packets are still stretching further than they did a year ago, giving household budgets some much-needed wiggle room after a challenging couple of years though the rising tax burden – a result of frozen or cut personal tax thresholds – means more workers will find themselves subject to higher rates of tax as their pay increases.
“The Bank of England, however, is likely to be concerned by better-than-expected unemployment rate and the strong real wage data as it signals that tightness in the labour market is persisting. This may affect whether they push ahead with a second rate cut next month as it will want to ensure any lingering inflationary forces are truly eradicated from the economy first,” she said.
Haine also noted that many households will have been buoyed by the first interest cut at the start of this month – particularly borrowers with heavy debts and large mortgages – but those banking on a second cut as early as September may have their hopes dashed.
“UK inflation is expected to rise for the first time this year when the next round of data is released tomorrow as favourable base effects from last year’s lower energy bills fade out of the annual calculations. Again, this may make central bank policymakers wary about going ahead with another rate reduction as soon as next month though the hope of more rate cuts this year remains.”
