GBP/USD Drifting Ahead of US Inflation

12/12/2023

2 minutes read

2023.12.12 06:58

MarketPulse

UK wage growth eases to 7.3%, lower than expected
US inflation expected to fall to 3.0%

The British pound is drifting on Tuesday. In the European session, is trading at 1.2551, down 0.04%.

UK Wage Growth Falls to 7.3%

Tuesday’s UK employment report was notable for the decline in wage growth. Earnings excluding bonuses rose 7.3% in the three months to October, down from 7.8% in the three months to September. This was lower than the consensus estimate of 7.4%.

Wage growth is an important driver of inflation and the decline is an encouraging sign for the Bank of England. Still, earnings are rising much faster than inflation, which suggests that the BoE won’t be cutting interest rates anytime soon. Inflation has fallen to 4.6%, but this is more than double the Bank’s target of 2%.

The BoE will announce its latest rate decision on Thursday and is widely expected to hold the cash rate at 5.25%. Governor Bailey has warned that rates could remain in restrictive territory for an extended period, but the markets are marching to a dovish tune and have priced in three rate cuts in 2024. Bailey has come out against expectations about rate cuts and we could see the BoE push back against rate cut speculation at the Thursday meeting.

US Inflation Expected to Ease to 3.0%

The US releases November CPI later today, with a consensus estimate of 3.0% y/y, compared to 3.2% in October. Monthly, CPI is expected to remain flat, unchanged from October. Core CPI, which has been running higher than the headline rate, is projected to remain unchanged at 4.0% y/y. Monthly, the core rate is expected to inch higher to 0.3%, up from 0.2% in October.

The Fed is widely expected to hold rates at a range of 5%-5.25% at the Wednesday meeting, but the inflation release could be a key factor as to what the Fed does in the upcoming months. There is a major disconnect between the markets, which have priced in four rate cuts in 2024, and the Fed, which is insisting that the door remains open to further hikes. A strong inflation report could chill market expectations for rate hikes, while a soft inflation release will provide support for the market stance and could force the Fed to reconsider its hawkish position.

GBP/USD-Daily Chart