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UK Wage Spike Gives British Pound Bulls Hope Recent Gains Can Stick

UK employment data to see GBP hold recent gains

Recent pound sterling gains look more sustainable in the wake of news wages and employment data have beaten analyst expectations in mid-week.

Wage data out of the UK were always going to be the highlight of the week with analysts arguing that the Bank of England was always going to look through the inflation numbers released 24 hours earlier.

Data shows that the claimant count - those unemployed looking for work - actually fell by 2.4K people while analysts were forecasting the rate to rise by 4.3K.

This compares to the previous month’s rise of 14.7K people. “The biggest surprise relative to trends over recent months was the re-acceleration of employment growth, with the level as of the January-March quarter 44k higher than 3 months ago,” say Lloyds Bank’s Commercial Banking unit in response to the data.

The latest data did see headline pay growth unexpectedly pick up, with average weekly pay (including bonuses) rising at a 2.0% annual pace, from 1.9% previously, stronger than the 1.7% expected.

This is where the pound would find any support the data has to offer as increasing wages are likely to stoke inflation over coming months.

The Bank of England will most likely have to respond to such pressures by raising interest rates which in turn boost the value of the pound as foreign investment comes into the UK seeking out higher yield.

That said, the reason sterling is not as high as we would expect is perhaps because, excluding bonuses, regular pay growth slowed to 2.1% from 2.2%.

“As bonuses tend to distort the headline total pay measure at this time of year, and regular pay trends tend to be stickier, arguably this is the more important metric, with the dip falling well short of expectations,” say Lloyds.

While there was no strong rise in the GBP following the data we do note that it continues to hold the gains made over recent days against the euro while holding onto the advances seen against the dollar made over the past two trading days.

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EU Inflation is Sticky, Euro Finds no Love

The euro exchange rate complex is meanwhile subdued in mid-week trade following the release of Eurozone inflation data which confirms prices in the bloc remain stuck.

The headline annual figure remains at -0.2% while monthly data are at 0%.

“Today’s results show that inflation in the eurozone is holding steady, but a contracting rather than expanding economy is surely not what Mario Draghi had in mind at this stage of his ECV presidency,” says Dennis de Jong, managing director at UFX.com.

de Jong reckons Draghi is running out of options to “turn around a flagging EU, and he will know that in just five weeks’ time he could have to deal with the uncertainty that a British vote to leave the European Union would bring.”

Waiting until the result is known on 24 June seems to be the order of the day for investors and policymakers alike.

That said, de Jong could be accused of overlooking recent GDP numbers out of Germany which are undoubtedly positive.

Germany now boasts the fastest growing economy in the G7 and we believe it will be incredibly hard to argue for further EUR-negative interest rates at the European Central Bank when faced with such growth.

Furthermore, a growing resistance to further rate cuts at the ECB amongst German politicians and civic society will also make the case for further easing measures harder to argue.

So the Eurozone may have to look for answers to their deflation issue elsewhere.

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