Pound on the rollercoaster after labor market report

The British pound initially strengthened but later pared some gains to settle at $1.26 as traders assessed a mixed labor market report, which reinforced expectations that the Bank of England (BoE) would remain cautious about cutting interest rates.

Pound on the rollercoaster after labor market report

The data showed that wage growth accelerated in the final three months of 2024, rising in real terms when adjusted for inflation, a sign that consumer purchasing power is improving despite economic headwinds. At the same time, the unemployment rate unexpectedly held steady at 4.4%, defying expectations of a slight increase. However, there were signs of softening in the labor market, as both vacancies and payrolled employees declined, suggesting that hiring momentum is slowing. This contrast between strong wage growth and weakening employment indicators has added to the complexity of the BoE’s monetary policy outlook.

BoE's Bailey remarks on wage growth

BoE Governor Andrew Bailey has repeatedly emphasized that wage growth remains a key driver of persistent services inflation, making it difficult for the central bank to ease monetary policy too soon. While markets had previously priced in a potential rate cut as early as mid-2025, the latest data have led to renewed speculation that the BoE may delay its first move, keeping rates elevated for longer. Looking ahead, traders are now shifting their focus to upcoming CPI and PPI figures due on Wednesday, which will provide further insight into inflation trends and the BoE’s potential policy trajectory. A hotter-than-expected inflation reading could reinforce the case for the central bank to maintain its current stance, while softer price data might encourage policymakers to consider rate cuts later in the year.

Geopolitical developments remain in focus

Meanwhile, geopolitical developments remain in focus, particularly after former U.S. President Donald Trump initiated peace talks with Russia in a bid to end the Ukraine conflict. In an unexpected move, UK Prime Minister Keir Starmer became the first European leader to propose sending peacekeeping troops to Ukraine, a decision that could have far-reaching implications for both European security and Britain’s financial markets. Investors are closely monitoring how these diplomatic efforts unfold, as any significant progress toward de-escalation could ease global market volatility and influence risk sentiment in the currency markets. As the pound remains sensitive to economic data releases and geopolitical risks, traders will continue to watch key indicators, central bank signals, and political developments for further clues on the currency’s direction in the coming months.