HomeContributorsFundamental AnalysisPound Gains Ground on Stronger Wage Growth

Pound Gains Ground on Stronger Wage Growth

The British pound has posted gains in the Wednesday session. In North American trade, GBP/USD is trading at 1.3359, up 0.30% on the day. On the release front, British Average Earnings Index improved to 2.5%, matching the forecast. However, Claimant Count Change increased by 5.9 thousand, compared to a forecast of 0.4 thousand. In the US, inflation numbers were a mix. CPI improved to 0.4%, matching the forecast. However, Core CPI, which excludes volatile items such as food and energy prices, edged lower to 0.1%, missing the estimate of 0.2%. Later in the day, the Federal Reserve is expected to raise rates to a range between 1.25% to 1.50%. On Thursday, the US releases retail sales reports and unemployment claims.

Inflation levels continue to concern policymakers in the UK, as CPI climbed to 3.1% in November, edging above the forecast of 3.0%. Inflation is now running at its highest level since March 2012. BoE Governor Mark Carney will be on the hot seat, as inflation continues to outstrip wage growth, leaving consumers with less purchasing power. The BoE raised rates in November for the first time in a decade, but the move has failed to blunt inflation from continuing to rise. The BoE is expected to maintain rates on Thursday, but the Bank may have to hike rates early in the year if inflation does not retreat below the 3.0% level.

The Federal Reserve is in the spotlight, as policymakers meet for a monthly policy meeting later on Wednesday. The CME Group has priced in a quarter-point rate hike at 87%, so it would be a huge surprise if the Fed doesn’t raise the benchmark rate. Even though this move has been priced in, rate hikes tend to trigger a surge of confidence among investors, and a rate hike could boost global stock markets. Today’s move could be the start of a series of incremental hikes, as the odds of a January increase stand at 86%. The Fed has hinted that it could raise rates up to three times in 2018, but the pace of increases will depend to a great extent on the strength of the economy and inflation levels. The US labor market remains at full capacity and various sectors in the economy are reporting a lack of workers. Still, this has not translated into stronger wage growth, despite predictions from Janet Yellen and other Fed policymakers that a lack of workers is bound to push up wages.

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