The British pound climbed sharply on Tuesday after the Office for National Statistics (ONS) reported a larger-than-expected drop in UK unemployment, reinforcing expectations that the Bank of England may keep interest rates elevated for longer.
UK Labour Market Remains Resilient
The UK unemployment rate fell to 3.8%, below the 4.0% consensus estimate, while average earnings including bonuses rose 6.2% year-on-year. The robust labour market data gives the Bank of England (BoE) room to maintain its restrictive monetary policy stance.
GBP/USD hit an intraday high of 1.2742 before pulling back slightly to trade around 1.2718 at the London close, still representing a gain of 0.52% for the session.
Bank of England Outlook
Markets now price in a higher probability of one more 25 basis point rate hike from the BoE at its next meeting. Governor Andrew Bailey has repeatedly stressed the importance of keeping inflation expectations anchored, and today’s wage growth data gives the committee ammunition to act if needed.
“Sterling bulls are back in control. The combination of strong wages and low unemployment is exactly what the BoE needs to justify holding rates high. GBP/USD at 1.28 is now firmly in play.” โ Currency Strategist
Traders will be watching the upcoming UK CPI release closely to determine whether inflationary pressures are easing sufficiently for the BoE to consider a pause.