Sterling to cheer positive wage growth

<p>This week’s key UK job & inflation figures This week’s release of UK inflation and earnings data may finally reveal that wages are above the […]</p>

This week’s key UK job & inflation figures

This week’s release of UK inflation and earnings data may finally reveal that wages are above the standard of living for the first time in almost 5 years. Tuesday’s release of March CPI is expected at 1.6% y/y from February’s 1.7%, but Wednesday’s release of February average weekly earnings could show an increase of 1.7% y/y from 1.4%, which would translate into real wage growth of 0.2%, the highest since September 2009.  The impact on sterling will likely depend upon the release of the ILO unemployment rate (expected at 7.1% from 7.2%) and the change in jobless (expected at -30K from -34.6K), but the longer term assessment will be on the improving trend in the pace of real wages, which helps in addressing the slack element in labour markets.

UK pay finally above inflation?

The charts below show the simultaneous decline in UK inflation and unemployment, as well as the increase in real wages (earnings minus CPI) overlaid against the 10-year gilt yields, which remains in tandem with G10-yields. These dynamics are another reminder of the importance of GBP strength in maintaining inflation expectations anchored within the BoE’s target at a time when further tightening in labour markets emerges alongside the slow but gradual expansion in UK growth. For these reasons, the BoE isn’t going to talk down sterling anytime soon. If anything, currency traders will continue buying sterling on the dips based on the classic combination of improved growth-low inflation. $1.6980 remains our objective and any decline below $1.63 remains behind us for now.

UK Chancellor George Osborne’s remarks at the G20 meetings stating the BoE is planning an exit strategy far from imply that a tightening will take place this year, but they do reflect the notable strength in sterling. The IMF has already forecast 2.9% GDP growth in 2014 for the UK, which is higher than all G7 nations, including the US. We do not subscribe to the notion that the Bank of England has or will talk down the currency, as it is needed to offset any rebound in inflation. The index of economic surprises in the UK continues to exceed that of the US, Japan, Germany, Canada and China. Wage growth is closing the gap with inflation and business surveys have remained robust after hitting multi-month highs earlier this year. Not only these figures (including positive real wage growth) will favour PM Cameron’s re-election bid next year in showing the positive spillover from the City onto main street, but they could also translate into an added boost to finally see a break above $1.69 in GBPUSD.

UK inflation vs unemployment vs earnings

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