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Currency News: Will UK Wage Growth Disappoint?

10 July 2017 by FC Exchange

Markets are keenly awaiting UK labour market data in order to predict whether the Bank of England (BoE) could be considering hiking interest rates in the near future, say industry experts FC Exchange.

Pound Sterling (GBP) – Will UK wage growth decline this month?

Last week saw little movement in the pound, being range-bound between 1.13 and 1.14. However, Friday produced a poor manufacturing production figure, coming in at -0.2% versus the +0.4% forecast, which caused sterling to fall.

Additionally, Deloitte’s latest CFO survey has shown that 42% of chief financial officers in the UK have become less positive regarding the economic outlook in the latter 3 months, with optimism up just 17% last quarter. The UK’s had a heavy political focus in the past year and economic data has been closely analysed as a result as economists try to forecast Britain’s future post-Brexit. With a difficult election and shaky politics still ongoing, optimism could continue on a rocky road.

This week, the UK will release highly anticipated labour market data including unemployment rate and average weekly earnings on Wednesday. Wage growth is expected to come in at 1.8%, down from the previous 2.1% reading. With inflation at unprecedented levels, the Governor of the Bank of England (BoE) Mark Carney, has earmarked this figure as critical when deciding on whether to adjust interest rates. The Monetary Policy Committee (MPC) will struggle to increase rates if the UK’s average wage is falling in real terms. Carney has already suggested that inflation will squeeze households this year, making the foreseeable future more difficult for Brits.

Two MPC members are speaking on Tuesday; BoE Chief Economist Andy Haldane at 10am, followed by Deputy Governor Ben Broadbent at 12pm. Haldane recently suggested he may be tempted to vote for higher interest rates soon in a speech that caused sterling to rally. The MPC was split in its last interest rate vote, meaning investors will be closely watching comments by policymakers.  In addition, the BoE will release its Credit Conditions and Bank Liability Survey on Thursday.

In terms of political events that could impact sterling, Theresa May has again shown weakness by asking opposing parties for more ideas and support of her Brexit policies. Many have viewed this development as May running out of ideas and seeking help from other politicians. The pound is likely to remain sensitive to developments in the political realm.
 

Euro (EUR) – Draghi hints at tapering

With little Eurozone economic news last week, the market is still digesting European Central Bank (ECB) President Mario Draghi’s mention of the potential tapering of monthly bond purchases. This came in addition to Draghi suggesting reflationary forces have replaced the deflationary pressures previously seen in the Eurozone. Market expectations are gathering pace and many industry experts now believe an interest rate rise before July 2018 is very likely.

This week is another light week for data for the single market, with only three EU statistics of medium importance due to make their way onto the scene and no scheduled speeches from Mario Draghi. However, there’s always the possibility of unplanned comments from other ECB members which have the potential to create market movement.

US Dollar (USD) – Yellen scheduled to make statements

Last Friday was the first of the month, and one of the most important US monthly figures hit the market in the form of non-farm payrolls. The labour market ecostat showed a bullish figure of 222K versus the 179K forecast.

The GBP/USD exchange rate, also known as cable, has been attempting to push past the 1.30 mark recently, a plight that hasn’t been helped by weaker UK data and stronger-than-expected US ecostats.

The week ahead is quite busy in terms of events that could impact the US dollar. Federal Reserve Chief Janet Yellen is due to speak on both Wednesday and Thursday and the market will be watching inquisitively trying to get some indication on future rate hikes.

Friday, is likely to be the busiest day for the USD, with inflation and retail sales figures due out – expected at 0.1% and 0.2% on the month respectively.

The main news from the G20 meeting is that Trump has vowed to sign a trade deal with the UK lauding it as ‘very big, very powerful’. Markets will be keen to see whether this actually comes to fruition or is this just more Trump hyperbole.

Australian Dollar (AUD) – Could the RBA hike rates quickly?

Last week the Reserve Bank of Australia (RBA) refused to increase interest rates. The official cash rate resides at 1.5% – a historical low. However, some experts expect interest rates could increase rapidly. Former RBA board member John Edwards wrote: ‘My guess is that [the RBA] is already thinking about a program of rate increases that will continue for several years.’

Disclaimer: This economic update is provided by FC Exchange a Global Reach Group Company, industry leaders in foreign exchange. Authorised affiliates are permitted to reuse content.

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