Due to strong wage growth, UK interest rate hike expectations increased along with the pound sterling exchange rate.

The release of the UK labor report in the European session on Tuesday, June 13, fueled the pound sterling's rally against various other major currencies. GBP/USD soared more than 0.7% to reach a one-month high of 1.2606 in early New York session trading and still climbing. Meanwhile, GBP/JPY soared about 1% to its highest level since January 2016.

GBP/USD

All indicators in the UK labor report were green. The data showed a drop in unemployment from 3.9% to 3.8% in April. The number of jobless claims in May also decreased by 13.6k, while the previous consensus expected an increase of 21.4k.

The Average Earnings Index for April 2023 showed a more significant increase. The Average Income Index Without Bonus increased from 6.8% to 7.2%, far exceeding the estimate pegged at 6.9%. Meanwhile, the Average Earnings Index With Bonus skyrocketed from 6.1% to 6.5%.

The Bank of England (BoE) is unlikely to slow down its interest rate hike amidst this labor market situation, as wage growth could push up UK inflation further. Consequently, the market expects the BoE to raise interest rates again from the current 4.5% level to around 5.0% or higher.

"Wage growth has far too much momentum for the MPC to stop hiking Bank Rate yet," says Samuel Tombs, Chief U.K. Economist at Pantheon Macroeconomics.

Pantheon Macroeconomics expects the UK pay growth momentum to slow as energy prices fall in the next six months. However, average weekly pay growth will only slow to around 5.0% by the end of this year. But the average weekly pay growth will likely slow to around 5.0% by the end of this year.