Sterling held firm on Tuesday despite a mixed batch of labour market data showing higher unemployment alongside persistent wage pressures.
The Pound-to-Euro exchange rate inched toward 1.19 after the Office for National Statistics (ONS) reported that average earnings, including bonuses, grew by 5.5% in the year to March, slightly lower than February’s 5.7%, but still above the forecast of 5.2%.
Meanwhile, the Pound-to-Dollar exchange rate bounced back from Monday’s lows, climbing just above 1.32, as markets assessed that wage levels remain too elevated to support a faster pace of interest rate cuts by the Bank of England.
Notably, the March data precedes the April increase in minimum wages and related government-driven pay hikes, suggesting that next month’s figures are likely to show an uptick.
More up-to-date figures from HMRC, which include April and reflect the rise in the National Living Wage, showed median pay growth accelerating to 6.4% year-on-year.
These signals align closely with the Bank of England’s May decision and guidance, which underscored the need to take a cautious approach to interest rate cuts.
However, there is room for the Bank of England to accelerate rate cuts later this year, as the unemployment rate climbed to 4.5% in the three months to March, its highest since 2021, Pound Sterling Live reports.
While wages remain high, businesses are facing added pressure from increased employment taxes and the recent hike in minimum wages, which could act as a drag on hiring.
“If last month’s labour market data hinted at an early response to upcoming employer tax rises, this month’s figures confirm a clearer weakening. Unemployment ticked up for the first time in four months by 0.1 percentage point, payrolled employment fell by 33,000, and vacancies dropped further,” stated Paige Tao, PwC UK economist.
The Pound could have climbed further if not for these developments, as markets likely sense some underlying weakness on the horizon. Still, the overall trend in major GBP exchange rates remains upward for the time being.
Furthermore, George Buckley, European Economist at Nomura, noted that key indicators of UK labour market activity and wage growth were softer in this latest report, reinforcing the argument for continued interest rate cuts.
However, Nomura does not believe the data is sufficient for the Bank of England to move as early as June, instead projecting the next 25 basis point cut to come in August, bringing the rate down to 4%.