The British pound (GBP) fell by 0.6% against the US dollar (USD) on Wednesday, January 17, 2024, as the latest UK labour market data showed a slowdown in wage growth, raising expectations of a possible interest rate cut by the Bank of England (BoE).
According to the Office for National Statistics (ONS), average weekly earnings in the UK, excluding bonuses, rose by 3.8% in the three months to November 2023, compared to the same period a year earlier. This was lower than the 4.0% increase recorded in the previous month, and below the market consensus of 4.1%.
The slowdown in wage growth suggested that inflationary pressures in the UK economy were easing, as the impact of the pandemic and Brexit-related disruptions faded. The UK consumer price index (CPI) inflation rate fell to 4.8% in November 2023, from a 10-year high of 5.1% in October 2023.
The softer wage and inflation data reduced the urgency for the BoE to tighten its monetary policy, which it had signalled in November 2023, when it kept its benchmark interest rate unchanged at 0.1%, despite market expectations of a 15-basis-point hike.
The BoE's next monetary policy meeting is scheduled for February 3, 2024, and analysts are divided over whether the central bank will pull the trigger on a rate hike or opt for a wait-and-see approach, given the uncertainty over the omicron variant of the coronavirus and its impact on the UK economy.
The GBP/USD exchange rate, which reflects the value of one pound in terms of US dollars, dropped to 1.3317 on Wednesday, January 17, 2024, from 1.3402 on Tuesday, January 16, 2024, marking a 0.6% decline. The pair has fallen by 2.4% since the start of the year, as the USD has strengthened on the back of the Federal Reserve's hawkish stance and the robust US economic recovery.
The USD has been supported by the Fed's decision to accelerate its tapering of asset purchases in December 2023, and its projection of three interest rate hikes in 2024, as it aims to combat the rising US inflation, which hit a 39-year high of 6.8% in November 2023.
The GBP/USD pair is likely to remain under pressure in the near term, as the divergence in monetary policy between the BoE and the Fed widens, and the UK faces the challenges of the omicron variant, which has led to a surge in COVID-19 cases and hospitalisations, and the implementation of new restrictions and travel bans.
However, some analysts believe that the GBP/USD pair could rebound in the medium to long term, as the UK economy benefits from the rapid rollout of booster vaccines, the resilience of consumer spending and business activity, and the potential for a trade deal with the US, which could boost the UK's exports and investment.
According to MarketBeat, the average 12-month forecast for the GBP/USD pair is 1.4025, implying a 5.3% increase from the current level. However, the range of estimates is wide, from 1.2500 to 1.5500, reflecting the high degree of uncertainty and volatility in the currency market.
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