The pound weakened slightly yesterday to a one-week low against the dollar after it was revealed UK wage growth has slowed, ahead of an expected squeeze on living standards from higher inflation in 2017. The euro benefitted from disappointing UK wage growth data and a lack of clarity from Janet Yellen regarding the timing of the next rate hike – although she has kept the possibility alive of an increase as early as next month.
Attention will now switch to the contents of the European Central Bank’s meeting minutes, due for release today.
GBP: sterling remains under pressure as inflation and wage growth converge
Labour data from the UK proved to be a bit of a mixed bag, keeping the selling pressure on sterling.
As expected the headline unemployment rate remained steady at 4.8% – even a shift of just 0.1% requires a large change actual numbers. The figure that is most closely scrutinised when deciphering trends is the claimant count, which measures the number claiming unemployment benefits. This number fell against the grain, having been forecast to grow by around 1,000. Instead it was revealed there were 42,400 less people claiming benefits in January compared to December. It should be noted that this number is volatile due to the continued roll-out of a new universal credit benefit system, but on face value this was a positive number for the UK.
Earlier in the week, it was revealed that inflation had pushed higher to just below the Bank of England’s target rate. Yesterday, data showed that in the three months to 31 December 2016, wage growth was at 2.6% which is above inflation. The figure slowed from 2.8% last month, which means the pace of inflation and wage growth are now converging – a concerning development. Inflation is expected to continue to rise and hit 2.8% next year according to the BoE. If wage growth continues to stumble these two number will cross, resulting in a reduction in household incomes. This would have negative knock-on effect of consumer spending.
It’s a quiet day in terms of economic data from the UK. In the meantime political developments will continue to take effect in the background, which could impact the pound. The next big release from the UK is retail sales data tomorrow, which is expected to reverse some of the negative readings that we saw last month.
EUR: spotlight falls on European Central Bank meeting minutes
Yesterday saw a quiet day in terms of eurozone releases, with only Spanish consumer price data and European Union trade balance figures provided. The Spanish data was disappointing, while the EU trade balance information showed an improvement. However, due to events in other markets, the euro actually finished higher against the US dollar and the pound.
Today sees the European Central Bank publish the minutes of its last monetary policy meeting and these should flesh out the ECB’s position on its quantitative easing programme. Any surprises could cause significant movement for the euro, as investors reassess the ECB’s likely course of action.
USD: rate hike on the way, but when?
The US dollar was relatively unmoved on Wednesday. Earlier in the day, the it reached a one-month high versus a basket of currencies as US data showed growth in retail sales and consumer prices in January. But traders were quick to take profit, thus reversing the move.
The dollar’s retreat could also be attributed to Federal Reserve Chair Janet Yellen, who in her second day of economic testimony before Congress offered no additional insight around the timing of the central bank’s next rate hike. Yellen had hinted on Tuesday that interest rate hikes were on the way, which propped up the dollar and sent it below 1.25 against the pound, further aided by a buoyant US jobs market and inflation closing in on the Federal Reserve’s 2% target.
Today sees potential support for Yellen’s rhetoric, with the release of US unemployment claims and manufacturing data.
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