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GBP gives back gains as wage growth disappoints

Summary:

  • Unemployment rate slips from 4.4% to 4.3%, employment accelerates
  • Wage growth in the UK comes in below estimations trimming odds for a bounce in consumption
  • GBP gives back its gains made in the aftermath of higher inflation

The UK’s jobless rate declined from 4.4% yoy to 4.3% yoy in July achieving the lowest level since 1975 and being lower than the BoE’s equilibrium rate. Furthermore, employment growth accelerated at the same time to 181k from 125k seen in the prior month, the biggest increase since the end of 2015. However, it goes without saying that it’s all about wage growth at this stage of things which disillusioned once again.

link do file download linkUK’s real wage growth has stayed subdued another month in a row boding not well for a bounce in terms of consumption spending. Source: Bloomberg

Even as both readings of nominal wage growth remained unchanged in July, those were below expectations, hence given that inflation proved higher in the same month it indicates that real wage growth remained dormant. What’s more, there are further concerns that a bounce of inflation pressures seen in August (published yesterday) might cut back on UK consumers’ purchasing power even stronger pushing the whole economy to the wall. To be precise, average earnings came in at 2.1% against the consensus at 2.3%. In turn, nominal wage growth excluding bonuses showed the same value while a slight pick-up to 2.2% had been anticipated.

Let us recall we suggested yesterday that higher inflation without the same scenario seen in wage growth was not a reason to be bullish on the pound for the time being. Today’s report illustrated that the UK’s economy could struggle in the third quarter as well which might result in the weakest GDP growth among its G7 peers a second quarter on the trot. Taking into account importance of consumption in the UK, a substantial wave of profit-taking on the GBP should be mind-blowing. Having said that, the BoE meeting (tomorrow) appears to be yet more interesting as the recent figures from the UK’s economy underline the dilemma facing BoE policy makers over when to consider raising interest rates, so some disputes between members may be expected.

By and large, the GBP has performed quite well of late predominantly on the back of the beleaguered greenback. Nonetheless, even as inflationary pressures have gathered momentum recently, it could not be a sufficient reason to deliver a rate increase given that almost the whole rise has been driven by the pound depreciation instead of endogenous factors such as solid domestic demand. That said, until real wages gain a foothold, rises of the GBPUSD could be contained let alone declines on the EURGBP (much better performance of the common currency).

link do file download linkThe EURGBP has bounced on lackluster pace of real wage growth in the UK. Source: xStation5

Technically, the EURGBP might be one of the best pair to express a possibly renewed bearish stance on the pound. The pair has pared back some of its gains and taking into account that economic momentum in the euro area is much more sturdier it seems that the pair could march higher in the foreseeable future. A support zone located in the vicinity of 0.8975 might be a compelling opportunity to consider taking a long, a bullish candlestick on a daily time frame has to be drawn though.

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