The pound has slipped back after hitting its highest level against the US dollar since the Brexit referendum overnight as wages have grown by less than expected.
Sterling hit $1.437 against the dollar this morning, its highest since 24 June 2016 when the EU referendum sparked a sharp decline from $1.50.
But official figures out today showing that wages grew by 2.8 per cent in the three months to February – instead of the 3 per cent predicted by economists – sent sterling down, breaking an eight-day winning streak that had been its longest in 2018.
Sterling was trading 0.11 per cent lower at $1.4322 following the release of the ONS labour market figures. It was also 0.11 per cent lower than the euro at €1.1565.
End of consumer squeeze? Not quite, but wages are now rising slightly above inflation
This is despite wages, including and excluding bonuses, now rising above the level of inflation for the first time since January 2017, relieving the spending squeeze on consumers. Consumer price inflation was 2.7 per cent in February.
The latest employment data also showed that the unemployment rate fell sharply from 4.7 per cent a year ago to just 4.2 per cent, the lowest since 1975.
Despite the mixed labour figures, the fact that wages are now growing faster than inflation is likely to reinforce expectations that Bank of England rate-setters will vote to hike interest rates next month when they meet on May 10.
David Lamb, head of dealing at FEXCO Corporate Payments, said that while the return of real wage growth in the UK was a sign of an economy that’s responding as it should to a tight labour market, it was also an inflationary risk.
‘So while it would be churlish not to welcome the news that the average Briton now has – fractionally – more money in their pocket than this time last year, it hasn’t helped the Pound.
‘The reason is interest rates and the likely shift in the Bank of England’s calculus in response to today’s data. While an interest rate rise in May remains a safe bet, the news that wage inflation is picking up speed will give the Bank serious reservations about hiking rates again this year.’
‘All of which has taken the shine off sterling, which had been enjoying an extraordinarily purple patch against both the Dollar and the Euro.’
Lamb added that, while earlier this week $1.44 had seemed within reach, the fact that a small rate rise in May will be ‘one and done’ for this year, the pound could struggle to reach that level in the short-term.
The pound today: After hitting highest since Brexit vote, the pound fell down again
Dollar weakness also played a part in driving the UK currency higher, having fallen on the back of further social media posturing by US President Donald Trump, who accused China and Russia of playing a devaluation game with their currencies.
Phil McHugh, chief market Analyst at Currencies Direct, said: ‘The stalling in wage growth should not deflect against a Bank of England rate hike on May 10 as the path for wages looks to be on a rising trajectory but we will have to wait a little longer for an end to the squeeze on income.
‘The pound has gradually moved higher through 2018 and momentum still looks solid with a hawkish Bank of England and reduced Brexit-related fears.
‘With Donald Trump also banging the drum for a weaker USD and with renewed GBP momentum, the path is now clearer for a push back towards 1.50 on GBP/USD.’
US President Donald Trump accusing China and Russia of playing a devaluation game with their currencies
The labour market data comes ahead of tomorrow’s inflation inflation data, which is expected to have fallen again, and retail sales on Thursday. Both sets of data will be closely watched by the Bank’s rate-setters.
Bank governor Mark Carney recently said rates would need to rise ‘somewhat earlier and by a somewhat greater degree’ to bring inflation back on track.
Experts widely believe rates, currently at 0.5 per cent, will rise in May by 0.25 per cent, and possibly again in November, with another due in 2019, which could see rates climb to 1.25 per cent next year.
Interest rate rise: Bank governor Mark Carney and the other rate-setters are expected to raise the base rate by 0.25 per cent to 0.75 per cent next month
Ben Brettell, Senior Economist, Hargreaves Lansdown said: ‘The squeeze on incomes isn’t quite over, as prices rose at an annual rate of 2.9 per cent during that period.
‘But with inflation currently running at 2.7 per cent, and expected to fall towards 2 per cent this year, it looks certain we’ll see real wages start to grow again in the coming months.
‘The figures reinforce expectations the Bank of England will lift interest rates at its May policy meeting. Markets are now pricing in an 85 per cent chance of a rate rise.’
But he added: ‘We should remember the Bank faces a delicate balancing act. Inflation seems set to fall back towards target, but a pick-up in wage growth points to an erosion of slack in the labour market. This raises the prospect that a wage-price spiral could push inflation back up in future.’