Recently, the pound sterling fell against other major currencies after data showed that wages in the UK slowed in October. Moreover, the downside risks are limited as these data are unlikely to change the Bank of England's policy stance tomorrow, Thursday. According to forex market trading, the GBP/USD was trying to rebound higher yesterday, but gains stopped at 1.2616. concurrently with writing this analysis, GBP/USD is stabilizing around 1.2565.
Recently, the Office for National Statistics said that wages, including bonuses, in Britain rose by 7.2% in October, much lower than expectations of 7.7%. In the face of the downside surprise came news that the September figure was revised higher to 8.0%. also, regular wages rose 7.3%, lower than the 7.4% that markets had expected and lower than the 7.8% recorded in September, which was also revised higher.
Following this data, money market interest rates show that traders have now fully priced in the Bank of England's first 25 basis point cut for June, while the first cut in August was expected at the start of the week. Thus, moving forward with bets on lowering interest rates led to a decline in the price of the pound sterling against other major currencies.
Substantially, wages are a key element in local UK inflation, and the Bank of England sees them remaining excessively high at current levels, not aligning with the inflation drop to the 2.0% target. Although the decrease in wage increases would be a welcome development. Meanwhile, it is unlikely that these data will prevent the Bank from warning on Thursday that interest rates should remain at 5.2% for an extended period.
Therefore, this message - of raising the long-term interest rate - helped the pound outperform during the month of November. In this regard, Jake Finney, an economist at PricewaterhouseCoopers in the United Kingdom, says: “It is expected that policymakers will confirm that interest rates should remain in the restricted area for some time.” He Added, “Although wage growth has slowed, inflation-adjusted wages are still growing on an annual basis. This is because headline inflation is declining at a faster rate.”
Moreover, the chances of the Bank of England shifting to a more hawkish stance in its speech on Thursday remain low as this wage data suggests that a more flexible labor market is starting to translate into slower wage growth. Between September and October, average wages including bonuses fell by 1.6%, compared to an average monthly growth rate of 1.1% in the first six months of this year.
The Bank of England "BoE” will feel it is on track to reduce inflation but will want to see more downward pressure on wages before considering interest rate cuts. Clearly, There is still significant uncertainty about whether wage pressures will slow down sufficiently in the coming months to prompt the Bank of England to cut interest rates.
Furthermore, Pantheon Macroeconomics states that the conditions for a cut are likely to be available soon in May 2024. However, economists at the Royal Bank of Canada say, "With inflation in the UK increasingly focused domestically, further cuts from here will be more challenging, likely requiring a more significant slowdown in wage growth compared to what we have seen so far." Also, RBC continues to see the Bank of England on hold until 2024, with the conditions for the Monetary Policy Committee to feel comfortable cutting the bank rate only in early 2025. For the British Pound, this is crucial: a rate cut in May will require implicit market expectations of a rate cut, likely leading to a depreciation of the pound.
Similarly, a rate cut for 2025 will require a significant reaction to expectations of rate cuts. consequently, that would be supportive of the British Pound.
GBPUSD Expectations and Analysis Today:
According to the performance on the daily chart below, the price of the British pound against the US dollar GBP/USD is still in a neutral position with a bearish tendency. Therefore, the bears’ control will increase if it settles below the support level of 1.2500. Undoubtedly, if the British growth numbers are weaker, and the US Central Bank confirmed today a tightening path. Clearly, His policy will give the bears the opportunity to move strongly to the support levels 1.2440 and 1.2370, respectively. On the other hand, over the same time period, the GBP/USD pair will move towards the resistance level of 1.2760. thus, there will be a good opportunity for expectations to return towards the psychological resistance of 1.3000 as soon as possible. Finally, the signals from global central banks this week are important in determining the direction of the currency pair in the coming days.
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