Are UK wages turning, and what does this mean for sterling?

This morning’s labour market data was a solid report for May/ June, the unemployment rate fell to 4.5%, which is considered the natural rate for UK unemployment, while the economy created 175k jobs in the three months to May, the highest level since last summer.

This morning’s labour market data was a solid report for May/ June, the unemployment rate fell to 4.5%, which is considered the natural rate for UK unemployment, while the economy created 175k jobs in the three months to May, the highest level since last summer. Wage data was also a touch stronger than expected, with ex-bonus weekly earnings touching 2%, expectations were for a rise to 1.9%. The question now is, does this signal a stronger period for wage growth in the UK, something that has been a long time coming? 

Even with the pick-up in wage growth in May, the consumer remains constrained, as CPI is running at 2.9%, however, things could start to get easier for UK households as we will explain. Chart 1 below shows UK 3-month jobs growth and UK ex. Bonus wage data over five years. As you can see, there is no real link between UK job creation and wage data, with the two often moving in opposite directions. However, the recent uptick in wages has corresponded with an uptick in job creation, after the two moved in opposing directions, as you can see marked in the chart. Wages tend to lag job growth, however, as job growth continues to pick up from the lows reached in Q3 last year, perhaps now is the time for wages to rise. Coupled with the recommendations from the Taylor report on the UK labour market and a move towards giving pay rises and benefits to those employed in the “gig economy”, this could be the long-awaited start of upward pressure on wage growth. One month’s worth of data does not make a trend, but we will be watching this development closely to see if our hypothesis is correct.

Data overtakes BOE as key driver of GBP

The pound is also looking perkier than it has done in recent days, as the market chooses the hard economic data over an interview with BOE deputy governor Ben Broadbent, who said he is not ready to hike rates yet. We doubt that this month’s wage increase will be enough for the majority of MPC members to hike rates on 3rd August, the next BOE meeting. However, if we get another month of decent wage data, even if jobs growth falls back, then it could set the scene for some BOE tightening late this year, something that the market is not expecting. Right now the market is expecting a less than 40% chance of a rate hike by year end, according to the UK Overnight Index Swaps market.

Technical view is warming to GBP/USD

The FX market is wasting no time pricing in the better tone to the UK data, which could set the scene for a return to the 1.30 highs in GBP/USD. My technical whizz colleague Fawad Razaqzada, has pointed out that the weekly chart GBP/USD will start to look bullish if this pair can close above 1.2870 today. Last week we saw a negative inside bar on the weekly chart, which can signify a bearish trend. However, if GBP/USD closes above the low of last week’s candle at 1.2867 then this would negate the bearish view indicated by the inside bar candle, and we may see back to the 1.3030 resistance level that has stymied GBP/USD bulls in recent weeks.

Overall, the technical picture is starting to look interesting for GBP/USD, however, the fundamental picture is mixed. The pound is likely to remain vulnerable to any dovish talk from MPC members, so tread carefully if you are looking at going long GBP in the coming hours and days. 

Chart 1: 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.