Pound strengthens on strong UK wage growth, BoE policy speculation
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The Pound Sterling (GBP) rallied on Tuesday after the latest UK labor market data revealed stronger-than-expected wage growth, bolstering the case for sustained inflationary pressures in the service sector.
UK Labor Market Report: Key Drivers of GBP Strength
The UK Office for National Statistics (ONS) reported that Average Earnings Excluding Bonuses surged by 5.2% in the three months ending October, surpassing market expectations of 5% and accelerating from the prior 4.9%. Including bonuses, wages also advanced 5.2%, outperforming the forecast of 4.6% and the revised previous reading of 4.4%.
The labor market report also showed the UK economy added 173K new workers, a deceleration from the upwardly revised 253K figure for the prior period. Meanwhile, the ILO Unemployment Rate remained stable at 4.3%, in line with expectations.
The robust wage growth underscores persistent inflationary risks, particularly in the UK services sector, which the Bank of England (BoE) closely monitors when formulating its monetary policy.
BoE Outlook: Steady Rates Amid Sticky Inflation
With UK core Consumer Price Index (CPI) data due Wednesday, estimates suggest inflation could accelerate to 3.6% year-on-year in November, up from 3.3% in October. Such an outcome would likely cement expectations that the BoE will leave its key interest rate unchanged at 4.75% in its Thursday policy decision.
Investors anticipate that BoE policymakers will remain cautious, balancing strong wage growth against broader signs of economic fragility. The central bank may adopt a more data-dependent approach to future rate adjustments amid ongoing inflation risks.
Fed Policy Looms Over GBP/USD
The Pound’s gains were further supported by a broadly weaker US Dollar (USD) as markets prepare for the Federal Reserve’s highly anticipated rate decision on Wednesday. While the Fed is widely expected to deliver a 25-basis-point rate cut to 4.25%-4.50%, investors are keenly awaiting Chair Jerome Powell’s commentary and the updated dot plot for guidance on the Fed’s policy outlook.
A “slightly hawkish” Fed stance could limit GBP/USD upside, particularly as recent US data, including December’s S&P Global PMI report, indicated a rebound in employment trends. Meanwhile, the US Retail Sales report, due later today, is projected to show a growth of 0.5%, potentially bolstering USD strength if the data exceeds expectations.
Technical Analysis: GBP/USD Gains Near Key Levels
GBP/USD is rebounding toward the 20-day Exponential Moving Average (EMA) at 1.2715 after finding support at the 1.2600 upward-sloping trendline, originating from the October 2023 low near 1.2035.
The 14-day Relative Strength Index (RSI) remains neutral, oscillating within the 40.00-60.00 range, signaling a lack of clear directional momentum. Immediate resistance emerges at the 200-day EMA near 1.2710, while downside support is reinforced at the psychological 1.2500 level. Outlook
With UK wage growth remaining robust and core inflation expected to edge higher, the BoE is unlikely to shift its policy stance on Thursday. The GBP/USD pair, however, faces significant event risks, including the Fed’s rate decision and US economic data, which will likely dictate short-term direction. A break above the 1.2710 resistance could pave the way for further gains, while sustained pressure below 1.2600 may reintroduce bearish sentiment.
UK Labor Market Report: Key Drivers of GBP Strength
The UK Office for National Statistics (ONS) reported that Average Earnings Excluding Bonuses surged by 5.2% in the three months ending October, surpassing market expectations of 5% and accelerating from the prior 4.9%. Including bonuses, wages also advanced 5.2%, outperforming the forecast of 4.6% and the revised previous reading of 4.4%.
The labor market report also showed the UK economy added 173K new workers, a deceleration from the upwardly revised 253K figure for the prior period. Meanwhile, the ILO Unemployment Rate remained stable at 4.3%, in line with expectations.
The robust wage growth underscores persistent inflationary risks, particularly in the UK services sector, which the Bank of England (BoE) closely monitors when formulating its monetary policy.
BoE Outlook: Steady Rates Amid Sticky Inflation
With UK core Consumer Price Index (CPI) data due Wednesday, estimates suggest inflation could accelerate to 3.6% year-on-year in November, up from 3.3% in October. Such an outcome would likely cement expectations that the BoE will leave its key interest rate unchanged at 4.75% in its Thursday policy decision.
Investors anticipate that BoE policymakers will remain cautious, balancing strong wage growth against broader signs of economic fragility. The central bank may adopt a more data-dependent approach to future rate adjustments amid ongoing inflation risks.
Fed Policy Looms Over GBP/USD
The Pound’s gains were further supported by a broadly weaker US Dollar (USD) as markets prepare for the Federal Reserve’s highly anticipated rate decision on Wednesday. While the Fed is widely expected to deliver a 25-basis-point rate cut to 4.25%-4.50%, investors are keenly awaiting Chair Jerome Powell’s commentary and the updated dot plot for guidance on the Fed’s policy outlook.
A “slightly hawkish” Fed stance could limit GBP/USD upside, particularly as recent US data, including December’s S&P Global PMI report, indicated a rebound in employment trends. Meanwhile, the US Retail Sales report, due later today, is projected to show a growth of 0.5%, potentially bolstering USD strength if the data exceeds expectations.
Technical Analysis: GBP/USD Gains Near Key Levels
GBP/USD is rebounding toward the 20-day Exponential Moving Average (EMA) at 1.2715 after finding support at the 1.2600 upward-sloping trendline, originating from the October 2023 low near 1.2035.
The 14-day Relative Strength Index (RSI) remains neutral, oscillating within the 40.00-60.00 range, signaling a lack of clear directional momentum. Immediate resistance emerges at the 200-day EMA near 1.2710, while downside support is reinforced at the psychological 1.2500 level. Outlook
With UK wage growth remaining robust and core inflation expected to edge higher, the BoE is unlikely to shift its policy stance on Thursday. The GBP/USD pair, however, faces significant event risks, including the Fed’s rate decision and US economic data, which will likely dictate short-term direction. A break above the 1.2710 resistance could pave the way for further gains, while sustained pressure below 1.2600 may reintroduce bearish sentiment.