EUR/GBP – UK wage growth cools which could enable earlier BoE rate cuts

• UK wages (inc bonus) rise 6.5% in the three months to November (7.2% in three months to October)
• Markets expect 125 basis points of rate cuts from the BoE this year
• Double bottom forms in EURGBP

Labor market figures this morning have kicked off a big week of economic data for the UK in a promising way, with wage growth a particular highlight from the report.

For a long time now, central banks have indicated that a significant amount of pressure from higher interest rates will need to be applied to cool the labor market – in turn, lifting unemployment and slowing wage growth – to return inflation sustainably to target. But recent evidence suggests that may not necessarily be the case.

Instead, inflation has been falling faster than anticipated, and now so is wage growth which has slowed significantly since the last peak four months ago. Average earnings growth including bonuses in the three months to November was 6.5% compared with 7.2% a month earlier and 8.5% four months ago.

Don’t get me wrong, that’s still far too high but it’s a lot of progress in a very short period, and with inflation now running much lower, there’s every chance we see much more over the coming months that enables the Bank of England to pivot towards cutting interest rates.

We’ll hear from BoE Governor Andrew Bailey later in the day who may offer his views on the recent data and perhaps hint at a change in tone when the central bank meets in a couple of weeks. It’s probably a little early to expect too big a pivot but it could lay the groundwork for a May cut as long as the data continues to comply.

EURGBP jumps after data, lining up a potential double-bottom

The pound did fall in the aftermath of the release but perhaps not quite as much as you’d expect from such an undershoot. That said, market positioning on rate cuts from the BoE was already far more aggressive than what many, especially at the central bank, have indicated is likely. Markets still see 125 basis points of cuts this year but there’s a growing chance of 150 which is more in line with the US and euro area.

EURGBP Daily

Source – OANDA

It comes after a period of weakness in the pair so far this month as it appeared to be heading back toward the range lows. However, it appears to have stalled a little higher than the December low and not only that, a double bottom has formed. The neckline wasn’t broken this morning, in fact, it acted as resistance and cut off the initial rally. But a break above could be a bullish signal in the near-term.

EURGBP 4-Hour

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