Sterling remains robust following the release of the UK jobs report this morning, revealing resilient wage growth and an unexpected drop in the unemployment rate. Total earnings, inclusive of bonuses, demonstrated a strong annual growth of 5.8% in October to December 2023, while excluding bonuses, it reached 6.2%—both surpassing consensus forecasts. This positive economic data may provide the Bank of England (BoE) with further justification to maintain higher interest rates for an extended period.
While the prospect of sustained high interest rates in the UK raises concerns for consumers, businesses, and politicians, it has concurrently allowed the British pound to maintain an appealing yield advantage over its global counterparts. The current premium of UK government bond yields over those in the rest of the G10 stands at over 110 basis points, a significant contrast to the 10-year average of just 20 basis points. Consequently, speculators have taken sizable long positions in sterling, totaling $2.71 billion—one of the largest seen in the past decade.
After receiving support at its 200-day moving average last week and advancing beyond the $1.26 mark against the US dollar, sterling continues to outperform other G10 currencies against the USD year-to-date. Particularly noteworthy are its substantial gains against the low-yielding Japanese yen, with a notable 5% increase since the beginning of 2024 and an impressive 52% surge since its post-pandemic low in March 2020.
The BoE's concern over inflation surpassing its 2% target dissuades any consideration of a premature rate cut, and today's job data reinforces this perspective. Although there is a minor probability of a BoE rate cut in March, the more plausible scenario is anticipated in June, as traders eagerly await the release of the latest UK inflation figures tomorrow.
