Sterling Weakens on Soft Wage Data, Eurozone Concerns Loom & Dollar Holds Steady
GBP
Sterling retreated against both the Euro and Dollar this week after the release of soft wage data, which further reinforced BoE’s decision to hold interest rates for the time being.
The three-month-to-August Average Earnings, excluding bonuses, softened to 7.8%, as expected, compared to the previous release of 7.9%. Alongside this, Average Earnings data, including bonuses, declined to 8.1%, falling short of the consensus of 8.3% and the previous release of 8.5%. This softening wage data could potentially have a dampening effect on overall consumer spending, a crucial component of the UK economy.
The UK’s primary statistics authority (ONS) finds itself in a predicament, having to postpone the release of critical labour market data. This development has triggered a ripple of concerns regarding the precision of these figures, which serve as pivotal markers guiding the Bank of England in shaping its interest rate decisions.
As wage data takes the spotlight, the attention of investors and speculators will soon turn to inflation data for September, which is due out tomorrow morning and is expected to set the tone for the November monetary policy.
According to the consensus, core Consumer Price Index (CPI) data is anticipated to soften to 6.0%, down from the 6.2% recorded in August. On a monthly basis, the headline CPI is expected to show faster expansion at 0.4%, compared to August’s reading of 0.3%. The annual CPI is also projected to decelerate to 6.5%, down from the previous reading of 6.7%.
The central bank’s stance on inflation is a matter of keen interest. It raises questions about whether they will focus on supporting economic prospects or return to the agenda of attempting to reduce inflation down to the 2% target. Any slowdown in progress will prompt policy makers to consider raising rates another 0.25% in November.
As the BoE gears up for its November monetary policy decision, the ongoing Israel- conflict is expected to have an impact. The disruption in the supply chain and the potential ripple effects of rising oil prices could contribute to persistent headline inflation.
After digesting the latest wage data, investors will be closely monitoring the September inflation figures to gain insights into the BoE’s direction. With the UK currently experiencing higher inflation compared to other G7 economies, any further softening in consumer inflation could provide some relief for BoE policymakers.
EUR
The Euro embarked on a rather lacklustre journey last week, marked by a less-than-promising start, primarily attributed to an unexpectedly substantial decline in Germany’s industrial production.
GBP|EUR, which had been gradually on the ascent, encountered a formidable resistance barrier around the 1.16 mark, preventing further gains, and then took a dip following the release of UK GDP figures.
The Euro’s descent continued as hawkish sentiments reverberated from the European Central Bank (ECB), while less-than-rosy wage data from the UK left Sterling in a dampened state.
Economic concerns loom large over the Eurozone, with JPMorgan and Citi expressing their expectations of the Euro’s descent to parity against the US Dollar. Since its peak in July, the Euro has lost nearly 6% against the Dollar. This outlook gains its backdrop from mounting tensions in the Middle East, where the looming threat of energy price surges and the weight of increased borrowing costs hang ominously over the Eurozone’s growth prospects.
The Eurozone is quiet on data this week with only the Core Harmonized Index of Consumer Prices and followed by an ECB speech from Lagarde tomorrow.
USD
GBP/USD faced a challenging week, ending the last two trading days last week in negative territory. Despite a modest rebound early on Monday, it struggled to gain momentum. The prevailing risk-averse sentiment in the market ahead of the weekend kept GBP/USD on the back foot.
Markets began the new week with a cautious stance, as tensions in the Middle East escalated due to the ongoing Israel-Hamas conflict.
If safe-haven assets continue to dominate the markets, USD may maintain its resilience against other currencies, making it challenging for GBP/USD to make substantial gains.
On the data front for the US this week we have retail sales for September, just released this afternoon which continued to show resilience last month, indicating that American consumers are still active in the market.
In September, retail sales, adjusted for seasonality but not inflation, increased by 0.7% compared to the previous month. While this figure is slightly below the revised 0.8% growth seen in August, it marks the sixth consecutive month of expansion.
The increase in spending was evident across most retail categories, with specialty stores experiencing the most significant growth, surging by 3%. Online sales and automobile purchases also exhibited robust growth, both rising by 1.1% in September compared to August. On the flip side, the two weakest-performing categories last month were clothing and electronics, which saw declines of 0.8% during the same period.
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