UK Wage Growth Accelerates in April to Put More Pressure on the BoE

It was a busy Tuesday morning on the UK economic calendar. With central banks and monetary policy in focus, the UK Labour Market Overview Report drew interest this morning.

UK average earnings + bonuses increased by 6.5% in April versus 6.1% in March. Economists forecast wages to grow by 6.1%. The UK unemployment rate fell from 3.9% to 3.8% in April. Economists forecast the unemployment rate to increase to 4.0%.

However, claimant counts fell by 13,600 in May, signaling tighter labor market conditions ahead. Economists forecast a 21,400 rise. Claimant counts rose by 23,400 in April.

According to the Office for National Statistics,

• The unemployment rate increased by 0.1 percentage points to 3.8% from February to April 2023.
• Economic inactivity declined by 0.4 percentage points.
• Wage growth in regular pay (excl. bonuses) increased by 7.2% in the three months to April 2023, the most marked growth rate outside of the COVID-19 pandemic.
• Job vacancies declined by 79,000 but remained above pre-pandemic levels.

While claimant counts and the unemployment rate were bullish numbers, wage growth will likely draw the interest of The Bank of England.

The Bank of England remains committed to bringing inflation to target. With wages a focal point, the more marked increase in wage growth will likely pressure the BoE to deliver a hawkish policy move at the next MPC meeting.

However, a hawkish BoE would also raise the prospects of a UK recession. The UK economy has proven resilient to the Bank of England’s responses to elevated inflation until now.

Sentiment could turn bearish should MPC members speak of more aggressive measures to bring inflation to target.

GBP to USD Price Action

Ahead of the Labor Market Overview Report, the GBP to USD fell to an early low of $1.25091 before rising to a pre-stat high of $1.25399.

However, in response to the UK economic indicators, the GBP to USD surged from a post-stat low of $1.25296 to a session high of $1.25666.

This morning, the GBP/USD was up 0.39% to $1.25570.

Next Up

Investors should also consider Bank of England chatter. Bank of England Governor Andrew Bailey is on the calendar to speak today. The BoE Governor will attend the Lords Economic Affairs Committee hearing ‘How is Independence Working?’

Eying the US session, the all-important US CPI Report is in focus.

The US CPI Report will be the main report of the day. Hotter-than-expected US inflation numbers would tip the monetary policy divergence scales in favor of the Greenback.

However, economists forecast the US annual inflation rate to soften from 4.9% to 4.1%, supporting a Fed pause on Wednesday.

The probability of a June rate hike fell from 29.9% to 18.5% this morning, according to the CME FedWatch Tool. However, the chance of a 25-basis point July Fed rate hike increased from 52.8% to 59.1%. Significantly, bets on a 50-basis point July interest rate hike fell from 17.1% to 11.9%.