The United Kingdom commenced a pivotal week marked by significant economic data releases, starting off with a discouraging labor market report that exerted downward pressure on the British pound this morning. The report revealed a more subdued wage growth than anticipated by economists, fueling speculations that the Bank of England might implement monetary policy easing sooner rather than later. Regular pay growth decreased from 7.2% to 6.5% over the three months ending in November. Although still exceeding the central bank's target rate, this marked the first instance of a sub-7% figure in eight months, underscoring the prevailing downside momentum.
Investors have adjusted their expectations, now foreseeing the BoE's policy pivot in May—one and two months later than the anticipated moves by the ECB and Fed. Despite this, we posit that the report strengthens the argument for the British central bank potentially needing more aggressive monetary easing compared to its counterparts, especially considering the expected dip in inflation below 2% in the first half of the year.
The upcoming focus is on the Consumer Price Index (CPI) release tomorrow, where core inflation is projected to decline from 5.1% to 4.9%. The negative price action in sterling today aligns with our perspective that the currency remains responsive to incoming data. Investors scrutinize the data to assess the likelihood of the UK diverging from its peers, thus justifying a distinct pricing trajectory for the Bank of England compared to the ECB and Fed. Currently, there are no signs pointing to such divergence. GBP/USD slipped below the $1.27 level, and there is an expectation that cable will close below this threshold for the first time in eight days. Despite an upward trend since November, breaching $1.2650 could bring the 50-day moving average at $1.2590 into play.
