Sterling strengthened against the dollar on Wednesday as investors awaited UK labour market data for signs of a pick-up in wages that could add to arguments for an eventual rise in record low Bank of England interest rates. The Bank of England (BoE) has highlighted stubbornly low wage growth since the 2008 financial crisis as one reason for keeping UK interest rates low. But the pound’s depreciation since last June’s Brexit vote has pushed inflation above the Bank’s 2 percent target and squeezed the spending power of consumers, who until recently were seen propping up the economy.
Economists polled by Reuters expect April’s wage growth reading to come in at 2.4 percent – still lagging inflation which came in at 2.7 percent in April and hit 2.9 percent, its highest in nearly four years, in May. At 0738 GMT, sterling was 0.3 percent higher at $1.2783 and 0.2 percent higher at 87.72 pence per euro. “Today’s average earnings data are arguably more important for sterling than the headline inflation data,” RBC currency strategist Adam Cole wrote in a note to clients.
“Sterling has failed to benefit from upside inflation surprises recently and this was again the case with yesterday’s May data. We put this down to the negative impact of higher inflation on real wage growth so long as nominal wage growth remains subdued.” Besides a data-heavy week culminating in a BoE interest rate decision on Thursday, investors also awaited a resolution of the political limbo resulting from last week’s national election, which produced no clear majority for any party.
Prime Minister Theresa May is still in talks with Northern Ireland’s Democratic Unionist Party (DUP) to form a minority government with her Conservative Party, less than a week before the formal start of Britain’s negotiations on leaving the European Union. On the subject of Britain’s exit talks, May has not departed from her initial position that “no deal would be better than a bad deal” with the EU, but some investors reckon her weakened mandate will leave her less able to pursue a hard negotiating stance.
Finance minister Philip Hammond will argue for Britain to stay in the customs union, in a bid to soften Brexit and alter May’s approach, the Times reported on Tuesday citing several unnamed sources. “A semblance of stability is helping (sterling) in terms of a minority government with a helping hand from the DUP. While it’s not ideal, ultimately it does suggest that we may not be getting another general election so maybe there’s a little bit of optimism there,” said Michael Hewson, chief market analyst at CMC Markets.