UK wage growth accelerated at the fastest pace on record, underlining BoE concerns that the wage-price spiral driving inflation across the economy has not yet been broken. Despite the broad-market strength of the US dollar, the GBPUSD pair gained on the day amid a rise in market valuations of the BoE's forward target rate to 6%.
Average wages excluding bonuses rose by 7.8% in the three months to June compared to a year ago. This was the highest result since 2001 and higher than the previous reading of 7.5%, which was also revised upwards, the Office for National Statistics (ONS) said on Tuesday. Economists had expected a result of 7.4%, down from the growth rate recorded earlier.
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The Bank of England is concerned that rising wages will drive up prices across the economy in the long term. Bankers led by Governor Andrew Bailey have said that further signs of this pressure continuing could lead to another interest rate rise. Source: Bloomberg Finance L.P.
And this has already started to price overnight swaps, which now indicate that the BoE forward rate is very likely to reach the 6% barrier. Source: Bloomberg Finance L.P.
Tomorrow we face another important macro reading from the UK, the CPI report for July. The CPI is expected to fall to 6.7%, the lowest level since the beginning of last year, but still more than triple the BOE's 2% target, a lower-than-expected reading could somewhat overshadow the tone of the wage data that weighed on today's session, despite a marked rise in unemployment.
The GBPUSD pair is currently trading in a narrow trading range, marked by the 50-day exponential moving average (blue curve) and the 100-day exponential moving average (purple curve). Despite the relative strength of the pound in the FX market, the scale of the upside is being reduced by the US dollar, which is being driven by declines in the stock markets. Tomorrow's CPI data could provide heightened volatility on the pair and determine the possible further direction of GBPUSD. Source: xStation 5
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