UK Average Earnings Deliver a Bank of England Headache

It was a busy start to the day for the GBP/USD. After a quiet start to the week, UK wage growth and unemployment figures drew interest this morning.

In November, UK average earnings plus bonuses increased by 6.4% versus 6.2% in October, with average earnings ex bonuses up 6.4%. Average earnings ex-bonuses increased by 6.1% in October. Economists forecasted increases of 6.2% and 6.3%, respectively.

According to ONS,

• The UK employment rate was 75.6% from September to November, 1.0 percentage points lower than before the COVID-19 pandemic.
• From September to November, the unemployment rate increased by 0.2 percentage points to 3.7% but remained unchanged compared with October.
• The number of vacancies from October to December was 1,161,000. While down by 75,000 from July to September, vacancies remained elevated.
• Growth in regular pay (ex-bonuses) was the strongest outside the COVID-19 pandemic period.
• Average regular pay growth for the private sector was 7.2% from September to November and 3.3% for the public sector. 7.2% was the most marked growth rate for the private sector outside the pandemic period.

Wage Growth Remains a Bank of England Area of Focus

For the Bank of England and the monetary policy outlook, wage growth remains a focal point. A continued pickup in wage growth could force the BoE into delivering another aggressive policy move despite the implications for the UK economy.

In November, the Bank of England warned the UK is facing its lengthiest recession on record, with further rate hikes expected to do more harm. While the macroeconomic environment has improved since November, headwinds linger.

The Bank of England Financial Stability Report (FSR) noted that low unemployment means that people are in a better position to manage the current period of stress.

A sharp rise in unemployment would force the BoE to reassess the impact of rising interest rates on households and their ability to repay debts. Rising unemployment levels would also bring down UK average earnings. Claimant counts increased by 19.7k in December, following a 16.1k rise in November.

GBP/USD Price Action

Ahead of today’s stats, the GBP/USD rose to an early high of $1.22132 before falling to a low of $1.21723.

In response to the stats, the GBP/USD slipped to a low of $1.21720 before rising to a high of $1,21971.

At the time of writing, the Pound was down 0.05% to $1,21902.

Up Next

While no members are speaking today, chatter with the media could move the dial. UK economic indicators for the week could have a material impact on BoE monetary policy. Inflation and retail sales figures are also out this week.

Brexit is another consideration for investors, with EU and UK negotiators back at the table this week. Northern Ireland and the Northern Ireland Protocol will remain the focal point, with the UK government looking to build better relations with the EU in the interest of the UK economy.

However, it is a quiet day ahead on the US economic calendar, with the manufacturing sector in the spotlight. A less marked contraction in the New York Empire State Manufacturing sector would support market bets of a soft landing.

With the stats on the lighter side, investors will need to monitor FOMC member chatter. Any talk of hitting pause on interest rate hikes or delivering another 50-basis point rate hike would move the dial. FOMC member Williams speaks late in the day.