The British pound strengthened on Tuesday, buoyed by a report showing UK wage growth outpaced expectations in the three months ending in October. Average weekly earnings, excluding bonuses, rose 5.2% year-over-year, exceeding the forecasted 5.0%, according to the Office for National Statistics (ONS).
The data has raised speculation that the Bank of England (BoE) may delay cutting interest rates in 2025. The BoE is set to announce its monetary policy decision on Thursday, with markets expecting rates to remain steady at 4.75%.
By midday, sterling (GBPUSD) was trading 0.1% higher at $1.2693, recovering from an earlier session low of $1.26685.
Sterling’s Resilient Performance in 2024
Despite a modest 0.3% decline year-to-date, the pound remains the best-performing major currency against the dollar in 2024, outperforming even the offshore Chinese yuan (USDCNH) and gaining 4.5% against the euro (EURGBP).
Much of this strength has been attributed to the “higher for longer” theme, with UK rates expected to remain elevated compared to peers. Benchmark 10-year UK government bond yields have surged by nearly 100 basis points in 2024, compared with a 54-bps rise in U.S. Treasuries and a modest 20-bps increase in German Bunds.
Economic Challenges on the Horizon
Despite the upbeat wage data, cracks in the UK economy are becoming evident. Recent reports revealed a second consecutive month of contraction in October, signaling waning economic momentum. The labor market is also showing signs of stress, with reduced staffing levels and declining job vacancies.
Kathleen Brooks, research director at XTB, warned that the robust wage growth might be temporary. “The economic backdrop is weakening, which will lead to a loosening of the UK labor market over the course of 2025,” Brooks said.
She also cautioned that markets might be underestimating the likelihood of rate cuts next year. Current projections show traders expect the BoE to reduce rates by 70 basis points in 2025, less aggressive than the 120-bps cuts anticipated from the European Central Bank.
Outlook for Sterling
While sterling’s recent gains are a testament to its resilience, long-term risks from a weakening economy and labor market could weigh on the currency. For now, traders remain optimistic, but the trajectory of BoE policy in 2025 will likely hinge on inflation and growth dynamics.
Stay tuned for Thursday’s BoE announcement, as it could provide crucial insights into the central bank’s future monetary stance.
