By Matt Boyle
This week has been a volatile one for the Pound – Wednesday saw it gain ground across the board following the release of better-than-expected UK wage data. Average earnings grew 4.7% in the three months to October, coming in much higher than the expectation of 4.4%, although still dropping slightly from the previous 4.8%. This unexpected and consensus-beating result saw the Pound gain around half a cent against the Dollar and Euro, whilst also making gains across all currency pairings. However, whilst wages are growing, the jobs market continues to shrink, with an additional 22k becoming jobless in October, now taking UK unemployment to 5.1%, the highest figure in five years.
Slowing wage growth and rising unemployment will no doubt encourage inflation to drop as public spending is squeezed, and as such will likely catalyse the Bank of England to cut interest rates. Add to that, this morning’s data release of UK CPI inflation at 3.2% for November – this is well under the expected figure of 3.5% and moving towards the BoEs target of 2%.
This saw much of the Pounds previous gains erased as it dropped around a half cent against the Euro and a full cent against the Greenback
With the Bank of England interest rate decision tomorrow, coupled with a slowing labour market and dropping inflation, it is all but nailed on that the Bank of England will cut interest rates and with it put additional pressure on GBP, as foreign investors look outside the UK and the Pound for higher returns. The current expectation is after Thursday’s cut of an expected 0.25bp, that the BoE will cut rates a further three times next year. Any more of less than this number will undoubtedly encourage movement in GBP rates, with inflation, wages, and unemployment key.
The European Central Bank also announces their interest rate decision this Thursday, where the general market consensus is that they will hold for a fourth consecutive meeting. With the ECB maintaining interest rates and the BoE expected to cut, any deviation or change to the committees’ respective votes could see the market move dramatically, so stay in touch if you have an upcoming requirement.
Elsewhere the US Dollar weakened this week following the US posting poor labour market data of its own. In October 105k more people became unemployed in the US, taking the unemployment rate to 4.6%. Like the situation in the UK, increasing unemployment will only encourage the Federal Reserve to increase momentum in US rate cuts, which will weaken the Dollar further. As with the UK, markets anticipate three cuts next year.
Whilst the BoE, ECB and FED previously raced to hike rates to combat inflation post Covid, it seems 2026 will be a race over interest rate cuts. More cuts mean more currency weakness, so data will come to the fore as it drives the various central bank’s policies and timeframes. Should you have a transfer to make in the upcoming months speak to your Currency Consultant today for some friendly guidance on how to make your money go further.