Sterling found itself vulnerable to heavy losses during Wednesday’s trading session after UK wage growth figures disappointed, remaining steady at 2.1% in the months up to July.
Although the UK unemployment rate fell to 4.3%, the lowest level since 1975, this was offset by disappointing figures in average weekly earnings, that only grew by 2.1%.
Wage growth is clearly struggling to keep up with inflation, which currently stands at 2.9% and as such, is likely to squeeze households further. With the gap visibly widening between pay and rising prices, concerns are mounting over the longevity of the UK’s consumer-driven economic growth.
Today’s UK labor report should add more spice to Thursday’s BoE policy meeting, especially when considering how the static wage growth may pressure the central bank to raise rates sooner than expected to tame inflation. While markets widely expect UK interest rates to be left unchanged in September, the main focus will revolve around the tone of the meeting and whether there are any dissents. A hawkish interest rate hold, coupled with clues on when the central bank plans to take action, is likely to offer sterling a welcome boost.
Rising inflation, subdued wage growth, and Brexit uncertainty have left the BoE in a complicated position; it will be interesting to see how the central bank puts this complicated jigsaw of events together