High wage increases may continue to drive accelerated inflation. Accordingly, the pound sterling exchange rate strengthened in the forex market.

The pound sterling strengthened in trading on Tuesday (17/January) following the release of UK employment data which was better than market expectations. GBP/USD climbed to a daily high of 1.2300 before receding slightly towards the 1.2270s entering the New York session. Meanwhile, EUR/GBP plunged about 1 percent to a one-week low.

uk recession

The UK Office for National Statistics (ONS) reported that the index of average earnings plus bonuses increased by 6.4 percent in November 2022. In contrast, consensus only anticipates an increase of up to 6.2 percent. October data was also revised up from 6.1 percent to 6.2 percent.

Other details in the same report are also encouraging. The UK unemployment rate remained at 3.7 percent, but the number of jobless claims was less than expected. The rolling quarterly employment change (3M/3M) also increased by 27k, better than the estimate of only 5k.

High wage increases may continue to drive accelerated inflation. Therefore, several analysts believe that the data will urge the Bank of England (BoE) to continue raising interest rates. The inflation situation that continues to be entrenched at high levels will also prevent the BoE from following the Federal Reserve's lead in reducing the intensity of monetary tightening at the beginning of this year.

"The labor market data is keeping pressure on the MPC (BoE) to raise interest rates by as much as 50 basis points next month, rather than slowing," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics. "Pay growth still has strong short-term momentum."

"We continue to expect a combination of slowing employment and falling CPI inflation in the second half of this year, which will warrant annual wage growth slowing to around 3.5 percent by the end of this year. However, the MPC (BoE) has to bet that signals of a slowdown in the labor market will slow wage growth if they stop raising interest rates in March," Tombs added.