Published: April 19th, 2023
Sterling rallied against EUR and USD in early trading the w/c 17th April, following publication of March labour and wage figures that revealed headline wages (including bonuses) rose by almost six per cent in the three months between December 2022 and February 2023.
The UK’s Office of National Statistics said the number matches an upwardly revised reading for February, which overshot the consensus expectations of 5.1 per cent.
An analyst note from ING Bank in London said ‘the recent speculation as to whether softening British wage data might prompt the Bank of England to re-schedule its May policy meeting. This week’s wage print suggests probably not. Sterling has received a modest boost from the data.’
If you exclude bonuses from the calculation, the ONS said pay actually rose by 6.6 per cent, also ahead of the 6.2 per cent markets anticipated and unchanged on from 6.6 per cent figure.
Threadneedle Street policymakers would have been looking for a clear signal that wage growth was slowing, in order to be convinced that UK inflationary pressures were dissipating.
The new figures could add support for a further 25 basis point rate rise when the Bank's Monetary Policy Committee meets in May. ‘It’s more than just the January wage figure being revised upwards,’ ING said. ‘February’s wage data also shot past consensus.’
The Pound to Euro exchange rate moved on expectations for another rate hike, moving up suddenly o 1.1331 in the hours after the data release. The Pound to Dollar rate also rose. Lifting to 1.241 when the figures were published.
In early January 2023 the Pound to US Dollar exchange rate opened the New Year with a strengthening foothold above 1.20, with inflation differentials suggesting it was undervalued below 1.25. American economic data however has been unexpectedly robust this Spring, adding headwinds to any GBP recovery.
US rates lacked a clear direction of travel in the final week of 2022, with price action that saw GBP/USD benefit from a resilient bid for Sterling near the 1.20 handle.
That suggested potential undervaluation for the pair. When bank rate and inflation differentials using a January 2022 starting level of around 1.3506 were considered, analysts said GBP/USD looked a bargain as long as it traded below 1.25.
Markets were bearish on the Pound outlook and prospects for the UK economy, as long as there was a chance that upcoming US economic prints would give investors inspiration for fresh bids for Greenback exchange rates.
‘A Dollar index move through 103.50 could be sufficient to move GBP/USD back through 1.2100, but it’s our view that the pair will finish the week below 1.2000,’ said Barclays in an analyst note.
GBP/USD slid more than ten percent in the latter months of 2022 as gloomy forecasts for Britain’s economy and a reduced pace of Bank of England (BoE) interest rate rises relative to US Federal Reserve kept markets in bearish mode.
‘Westminster’s plans to reduce financial sector regulation post-Brexit could give net capital inflows a boost, though there are a number of potential risks which could weigh on Sterling's ascent in the first half of next year,’ added Barclays.
It's worth noting that a lack of UK economic news also gave the American data calendar an outsized impact on the Pound to Dollar rate in the early weeks of 2023.
Back in May 2022 the Pound to Dollar rate found itself under heavy selling pressure as investors ran for cover ahead of US Federal Reserve’s expected quantitative tightening (QT) process and the end of COVID-driven monetary stimulus.
Sterling was trading as low as 1.2412 at its lowest point in the first week of May 2022, as a rallying greenback hammered most G10 majors including the Euro and Yen.
In a research briefing, Barclay’s wrote that the dollar’s core drivers are ‘easy enough to see’.
‘You have a hawkish Fed mixed with a waning global risk appetite. Meanwhile the Eurozone is grappling with a situation that look like stagflation, while Chinese economic lockdowns sparked by the latest Covid outbreak look set to drag growth expectations down.’
Barclays also said GBP/USD rate losses at the time were a reflection of the widening policy gap between the Fed and Bank of England (BoE). The Fed was widely expected to raise its interest rate by 50 basis points even as it announced plans for QT or quantitative tightening, the balance sheet reduction process to scale back the stimulus pumped into the US economy following the first COVID outbreak.
'When we decide on timings, we're mindful of the wider financial and economic context,’ Fed Chairman Jerome Powell said at the Fed's monthly press conference in April 2022. 'We will use the tools at our disposal to support financial and economic stability.
‘We always want to support growth while sustaining financial stability. We also want to avoid bringing more uncertainty to an already uncertain situation.’
Dollar strength and losses for other currencies had combined to create an inflationary mess that risked pushing the Bank of England (BoE) and European Central Bank (ECB) to raise their respective interest rates earlier than they might have otherwise.
An analyst note from BMO Capital Markets said that the ‘recent remarks from (BoE Governor) Philip Lane and ECB President Lagarde, confirm that the weak Euro is a worry for the ECB.’
A strong greenback and rising US bond yields also prompted the People’s Bank of China (PBoC) to hold back on stimulus in May for regions where COVID containment measures have led to economic slowdown, stoking market fears about the global economic outlook.
BMO said rising US interest rates were driving capital outflows. ‘Because they aren’t unsynchronized with Beijing's divergent monetary policy, that adds downside to growth risks.’