Bank of England Believes Inflationary Pressures Should Push Up Wages as Labour Market Reaches Capacity
With unemployment falling to 5.2% this quarter, Britain is drawing closer to what is known as the ‘natural’ unemployment rate of below 5%. Once it reaches this level, the Bank of England believes inflationary pressures will force employers to pay higher wages in order to find the right workers for the job. With more people employed, finding the right candidates will be harder without the proper incentives. So while wage growth slowed this month, the healthy jobs market could see pay packets increase again in the near future.
UK unemployment fell slightly during the last quarter, but a bigger-than-expected drop in wage growth will cast doubts over the future of UK inflation, especially after yesterday’s positive, but sluggish, CPI figures. Meanwhile, the Euro is trending up despite a mixed bag of Markit PMIs, while the US Dollar is managing to make some bullish gains ahead of the Federal Reserve interest rate decision later today.
GBP/EUR Exchange Rate Forecast: Slowing UK Wage Growth Could Harm Inflation
Mixed UK employment data has been released today, showing that the UK labour market is almost at capacity, although wage growth has slowed considerably over the last quarter. The positive news is that unemployment fell unexpectedly during the previous quarter, dropping to 5.2%, with the total number of people in work rising 207,000 quarter-on-quarter to 31.30 million. The employment rate rose to 73.9%, which is the highest since records of comparable statistics began in 1971.
However, despite the positive employment news, wage growth has slowed. Average Weekly Earnings growth dropped from 3.0% during the previous quarter to 2.3%. Although wage increases aren’t being negated by inflation – prompting some employers to slow pay rises – the present rate of pay increase is modest when compared to historical averages and workers endured a fall in real wages for several years following the financial crisis.
Slow wage growth will come as a concern to economists, as consumer spending drives inflation. Considering yesterday’s CPIs showed that inflation is increasing slowly, the news that wage growth is slowing will see many investors wondering if the Bank of England’s (BoE) predictions of inflation hitting their 2% target by the middle of 2016 are far too optimistic.
Pound Sterling is currently trending down -0.2% against the Euro, despite Eurozone PMIs showing an overall slowdown in growth. The French, German and Eurozone Composite PMIs all declined by more-than-anticipated, as did the German and Eurozone services indexes. Only the manufacturing PMIs increased.
Markit’s Chief Economist, Chris Williamson, says that: ‘The Eurozone economy enjoyed a comfortably solid end to 2015, though policymakers are likely to remain disappointed by the relatively modest pace of expansion and lack of inflationary pressures, given the stage of the recovery and the amount of stimulus already in place.’
GBP/USD Exchange Rate Trending Down as US Dollar Bullish Before Fed Interest Rate Decision
Markets across the world are bracing themselves for the impact of today’s interest rate decision by the Federal Reserve, with the outcome widely accepted to be the first interest rate rise for a decade. Despite the markets being unsettled recently, with worries about the economic slowdown in China and the prospect of a continued slump in global oil prices, it is unlikely that the Fed will decide not to increase interest rates. Policymakers have been signalling the likelihood of a rise for several months now, so to do nothing would suggest they had serious reasons to be worried about the economy, resulting in a loss of trader confidence.
This afternoon has seen mixed data for the US economy, with the housing market experiencing a significant jump in the number of building projects awarded permits and the number of projects which started construction. Less impressive was the fact that manufacturing production failed to grow in November, while industrial production continued to fall, with the rate of contraction accelerating to -0.6%.
GBP/EUR, GBP/USD Exchange Rate Forecast: Investors Focussed on Yellen Press Conference
Fed Chair Janet Yellen is due to give a press conference shortly after the interest rate decision has been announced. Traders will be paying plenty of attention to her words as the focus shifts to the future pattern of interest rate hikes, which are predicted to be soft and gradual. Suggestions that the Federal Open Market Committee (FOMC) have particularly dovish or hawkish views towards future interest rate hikes could have a significant impact upon US Dollar exchange rates.
The Pound Sterling to Euro (GBP/EUR) exchange rate is currently trending between 1.3702 and 1.3774, while the Pound Sterling to US Dollar (GBP/USD) is trading between 1.4984 and 1.5058.
The Euro to US Dollar (EUR/USD) exchange rate is currently trending between 1.0913 and 1.0959, while the US Dollar to Euro (USD/EUR) exchange rate is trading between 0.9124 and 0.9159.