Good news for wage earners yesterday could be bad news for mortgage holders, as a strong rise in wages of 5% – far outstripping even the sharp rise in inflation announced on Wednesday – continues to put an interest rate cut in early August in doubt.
The wages news caused a modest but general strengthening of sterling, despite the Office for National Statistics also revealing bad news for the labour market. Unemployment in the UK is now at 4.7%, its worst for four years. Employers cut 25,000 jobs in May, with another 40,000 likely in June. This all follows the rise in National Insurance contributions that employers must pay following the last Budget. Hospitality and retail jobs fell most, so if the service is lousy in the pub or shops this weekend you know who to blame.
This may weigh more heavily on the minds of the Monetary Policy Committee which decides on interest rates and is now faced with stagflation: should it cut interest rates to boost the economy or keep them high to keep inflation down?
Why would this bother the currency markets? Because higher interest rates cause inflows of investment which boosts a currency, and vice versa. To understand more about this, alongside predictions for exchange rates from leading banks, download your new Quarterly Forecast today.
The US dollar moved strongly ahead after President Trump rowed back on his earlier suggestion that he should fire Federal Reserve Chair Jerome Powell. Another Fed policymaker, Mary Daly, said that keeping inflation low was the absolute priority and that the US economy is “in a good place”.
Sterling has avoided further losses since the start of July against the euro, while declining by some 2% against the US dollar. This is all after a blizzard of high-level data and no shortage of political and economic announcements. Are things about to quieten down? Parliament breaks for summer next week, but focus remains on the Fed’s interest rate decision on 30 July and the UK’s on 7 August.
The final piece of high-level economic data before that decision will be the Purchasing Managers’ Index (PMI) next week.
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