Data in Driving Seat for Pound as Wage Inflation Seen as Key

Updated on
  • A miss on wage inflation could push pound to $1.2780: ING
  • Markets pricing around 60% chance of BOE hike in 2017

For pound traders, this week’s U.K. employment report has become far more important.

A string of disappointing data hurt sterling last week, pushing it down 1 percent, and puncturing a rally sparked by a hawkish shift among some members of the Bank of England’s Monetary Policy Committee. With wage growth being one of the key pieces of hard data due before August’s rate decision, the outcome could be crucial for the pound, according to ING Bank’s currency strategist Viraj Patel, who forecasts that a disappointing number “could see a test of $1.2780.”

The pound was little changed at $1.2888 by 9:25 a.m. in London on Monday.

Recent reports showed U.K. manufacturing, industrial and construction output all dropped in May, while a gauge of services last month was lower than analysts forecast. That paints an economic picture at odds with the view of some BOE officials, whose increasingly hawkish rhetoric has left markets currently pricing about a 60 percent chance of a 25-basis-point hike by the end of this year, according to MPC-dated SONIA.

“We have the key wage inflation numbers which are basically what the MPC hawks have been hanging their hats on,” ING’s Patel said. “Our economists are not expecting any sort of wage inflation in that labor market report. We think it’s more realistic to be having the rate hike debate in 2018 rather than later this year and U.K. rates should be priced more for this.”

In the labor report, due July 12, average weekly earnings are seen slowing to 1.8 percent in the three months through May, according to a Bloomberg survey of economists, from a previous reading of 2.1 percent. The ex-bonus figure is forecast to be 1.9 percent.

(Updates prices.)
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