Insight & Analysis

Pound’s value hangs in the balance

Published: Sep 2023

After many months of having a weak Pound, the UK and its currency are showing signs of recovery. Any further gains, however, are not certain and the Pound’s value could be beholden to the central bank’s next move on interest rates.

Rocks balancing cleverly at the beach

The UK – and the Pound – have been through a lot in recent years: Brexit, the pandemic, the ensuing inflation and cost of living crisis. In September 2022, the Pound took a particular battering during the short tenure of Prime Minister Liz Truss and a mini-budget that sent confidence – and the value of Sterling – plummeting.

Since then, the Pound has been making gains, but its future trajectory is uncertain and it’s strength hangs in the balance as the UK waits to see whether inflation will come down and its economy perform well. Commentators were keenly awaiting the latest wage and employment figures as indicators of how the UK economy is faring, and what this will mean for inflation, interest rates – and the Pound.

The latest wage data from the Office for National Statistics (ONS) was encouraging, with wage growth outpacing inflation. The wage growth – including bonuses – even hit a new record at 8.5% and is the highest since records began in 2001. This compares favourably to the consumer price index (CPI) measure of inflation, which is currently at 6.8%. “This means people’s real pay is no longer falling,” Darren Morgan, ONS’s Director of Economic Statistics, was quoted as saying.

Such news was rallying for the Pound, but the ONS’s employment figures were less encouraging. Unemployment has been rising for the quarter ending in July and had increased by 0.5 percentage points during that period to 4.3%. The number of vacancies also fell, as well as the number of people in work. Employment has dropped by 207,000 – which is a larger figure than predicted – in the quarter ending July.

Any gains the Pound made on the positive wage growth news were stymied by concerns about what the employment figures indicate about the general health of the UK economy. Trading of USD/GBP fluctuated above and below the US$1.25 mark as the market assessed the nuances of what the latest ONS figures signal in terms of inflation and interest rates.

Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, commented the ONS wage growth figures may mean the Bank of England will continue to raise the bank base rate, a decision that will be taken next week by the Monetary Policy Committee (MPC). He summed up his take on the ONS figures and what this means for interest rates: “Wage growth is continuing to hold the MPC’s feet to the fire.”

With wages increasing, there are fears prices could spiral and the central bank will need to continue to tighten its monetary policy. That approach, however, was called into question a week prior when the Governor of the Bank of England Andrew Bailey commented that the worst of the UK’s inflation is almost over and signalled the BoE’s period of rate hikes will come to an end.

Bailey said he expected inflation to “fall quite markedly” and commented “I think we are much nearer the top of the cycle”. These comments had an immediate impact on Sterling, driving its value lower, with GBP falling below US$1.25, the lowest it had traded for at least two months.

Since then, the ONS wage and employment figures were published, which has also caused further commentary about what the central bank’s next move is likely to be. Although inflation may be easing many commentators believe it likely the Bank of England’s MPC will decide to increase the base rate when it meets next week. This, however, may be one of the last increases, a decision that will impact the Pound’s strength. While question marks loom over the state of the UK’s economy, the future strength of the Pound will continue to be uncertain.

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