Sterling firms as UK wage growth beats forecasts

Sterling firmed against both the dollar and the euro on Wednesday after UK labour market data showed wage growth running hotter than economists had expected, reinforcing the view that the Bank of England has little near-term appetite to follow its counterparts into a faster pace of rate cuts. Average weekly earnings, excluding bonuses, rose 5.4% year-on-year in the three months to June, ahead of the 5.1% consensus estimate and only marginally below the previous month's reading.

GBP/USD reclaimed the 1.27 handle for the first time in three weeks, while EUR/GBP slipped to its lowest level since early June as traders pushed back expectations for the next Bank of England rate cut. Money markets, which had priced close to a 40% probability of a reduction at the upcoming Monetary Policy Committee meeting earlier in the month, now assign a probability below 20%, a repricing that has been the single largest driver behind sterling's advance this week.

The strength in wage growth sits uncomfortably alongside the Bank's own stated goal of returning services inflation to a pace consistent with the 2% target, and several MPC members have used recent public commentary to flag wage pressure as the primary obstacle standing between the current policy stance and further easing. With unemployment holding steady at 4.2% and vacancy levels still comfortably above their pre-pandemic norm, policymakers appear to have little cover to justify a near-term cut even as growth data elsewhere in the economy has softened.

Retail sales and manufacturing output both undershot expectations in the same data window, illustrating the balancing act facing the Bank as it weighs sticky wage and services inflation against clear signs of a cooling broader economy. That tension has left the pound trading somewhat out of step with the rest of the UK data set this week — strong on the back of one release, even as the wider growth picture points toward exactly the kind of slowdown that would normally argue for currency weakness.

Gilts sold off modestly in the wake of the release, with two-year yields rising roughly eight basis points as the market absorbed the reduced likelihood of near-term easing. The move in yields, more than the headline currency reaction, is what several rates strategists pointed to as the more durable signal from the data — a genuine repricing of the path of UK policy rather than a one-day currency spike likely to fade by the weekend.

Technically, cable's move above the 1.2680 resistance that had capped the pair for much of July opens the door toward 1.2760, a level that has acted as both support and resistance repeatedly over the past year. A close above that zone would put the pair on track to test its year-to-date high, while a failure to hold the newly reclaimed 1.27 handle would suggest the wage data, however strong, was not enough on its own to shift the broader trend. Attention now turns to next month's inflation print, which the Bank has signalled will carry particular weight in determining whether September brings the first cut of the easing cycle.