The UK wage data suggests the BoE may keep interest rates high for longer, which is positive for GBP/USD.
The pound sterling saw limited movement in European session trading on Tuesday (14/November) following the publication of the latest set of UK employment data. GBP/USD briefly tested the 1.2300 level, while GBP/JPY continued its rally to the 186.60s.
The UK employment report released this afternoon showed a mixed situation. The unemployment rate stagnated at 4.2% in September 2023, slightly better than the consensus estimate of 4.3%. However, the number of jobless claims for October 2023 surged to 17.8k much higher than the estimate of 15.0k.
Market participants chose to focus more on the Average Earnings Index which is usually an indicator for wage inflation. The Average Earnings Index Without Bonus slowed from 7.9% to 7.7%, exactly in line with market expectations. Meanwhile, the Average Earnings Index Plus Bonus recorded 7.9%, or higher than the consensus estimate of 7.4%.
The number of job creation also increased by 54k in September 2023, presenting a positive surprise after being negative in the previous month's reporting. Some investors consider these figures to suggest UK labor market conditions remain tight and complicate the central bank's efforts to lower inflation. Therefore, the BoE may be able to keep interest rates high for longer.
"With wage growth continuing to ease and signs that a further loosening in labor demand lies ahead, higher interest rates appear to be gradually working", Capital Economics economist Ashley Webb said. The economist added, "Wage growth will slow only gradually suggesting that the Bank of England would keep interest rates unchanged at 5.25 percent until late 2024."
HSBC earlier this week also revealed an estimate that the BoE will only cut interest rates starting in early 2025. The reason is the same, namely the relatively high wage growth in the UK.
The predictions of some experts are contrary to market speculation. Recent market data shows that the majority of traders expect the BoE to cut interest rates in mid-2024.
The gap between economic data and expert analysis versus market speculation opens up opportunities for the pound sterling to strengthen going forward. However, the current strength of the US dollar still hinders the GBP/USD rally partly because US economic growth expectations are better than the UK economic outlook.