Sterling strengthened on Tuesday, buoyed by data revealing that UK wage growth exceeded expectations in the three months to October, increasing the likelihood that the Bank of England will hold off on rate cuts next year.

According to the Office for National Statistics, average weekly earnings, excluding bonuses, rose by 5.2% in the three months to October compared to the previous year. This was higher than the 5.0% increase anticipated in a Reuters poll of economists.

Sterling was last up 0.1% at $1.2693, recovering from an earlier low of $1.26685.

The Bank of England (BoE) is set to announce its monetary policy decision on Thursday, with markets anticipating that rates will remain at 4.75%.

Looking ahead, money markets indicate that traders expect the BoE to reduce rates by around 70 basis points next year, similar to the anticipated cuts from the US Federal Reserve, and around 120 basis points in cuts from the European Central Bank, Reuters reports.

The “higher for longer than elsewhere” theme has been a major factor behind the Pound’s strength this year, making it the best-performing major currency against the Dollar in 2024. 

Although it has fallen 0.3% year-to-date, it still outperforms the offshore Chinese Yuan, which has lost 2.3%. Against the Euro, the Pound has gained about 4.5% in 2024.  

Furthermore, benchmark 10-year UK government bond yields have increased by nearly a full percentage point this year, outpacing the 54-basis point rise in 10-year US Treasuries and the 20-basis point increase in German 10-year yields.

However, signs of strain are emerging in the UK economy. Recent data revealed that the UK economy contracted for a second consecutive month in October, while the labour market is weakening, with employers reducing staff and job vacancies declining.

“In the longer term, although wage data was stronger than expected, we think that the economic backdrop is weakening, which will lead to a loosening of the UK labour market over the course of 2025,” said XTB research director Kathleen Brooks.

“Thus, there is a risk that the market is currently underestimating the chance of rate cuts from the BOE next year,” she added.