Slower Wages Open Door To March Rate Cut

The Pound Sterling fell against both the euro and the US dollar on Tuesday as slower UK wage growth revived expectations of a Bank of England rate cut in March.

Markets remain unsettled by the escalation in tensions between the US and Europe over Greenland, with risk assets under pressure and the US dollar continuing to slide.

At the same time, the UK jobs report showed stable unemployment but further cooling in wage growth, increasing expectations of a Bank of England rate cut in March.

Sterling weakened on the data, falling around 0.5% against the euro as traders priced in a more dovish BoE outlook.

Markets are still digesting developments linked to the Greenland dispute, with risk appetite deteriorating further on Tuesday. European equities extended losses, with the German DAX down around 1.4%, while US futures pointed to a weaker open following the long weekend.

Safe-haven demand has intensified. Precious metals pushed to fresh all-time highs, while the US dollar fell another 0.6%, reinforcing talk of a developing “sell America” theme that has also weighed on US bonds.

EUR/USD climbed more than 0.7% to move above 1.17. Sterling lagged the broader dollar sell-off, however, with GBP/USD up only modestly. EUR/GBP rose around 0.5% to move back above 0.87, reflecting underperformance in the pound following the UK labour market data.

UK Jobs Report Weighs on Sterling

The latest UK employment figures point to a labour market that continues to cool, according to data released by the Office for National Statistics.

The headline unemployment rate held steady at 5.1%, but underlying indicators suggest a shift in momentum, particularly in wage dynamics. For Bank of England policymakers, wage growth remains a critical input, and the latest figures provided further evidence that pressures are easing.

As ING noted:

“Bank of England officials – or some of them at least – remain concerned about inflation. The latest UK jobs report suggests those concerns are overblown.”

Total pay growth, including bonuses, slowed to 4.2% year on year, coming in slightly below expectations and marking a clear deceleration from last year’s peaks. The easing was most pronounced in the private sector, where firms continue to cite squeezed margins and economic uncertainty as reasons for more restrained pay settlements.

For the BoE, this reinforces the view that the wage-price spiral is breaking and that the labour market is no longer a major inflation threat.

That said, policymakers will be wary of the cooling turning into outright weakness. Unemployment has risen from 4.4% to 5.1% over the past year, private-sector payrolls fell by another 55,000 in December, and vacancies declined for a nineteenth consecutive period. All of this comes against a backdrop of sluggish growth and fragile business confidence.

March Rate Cut Back on the Table

Markets reacted to the data by nudging sterling lower, as traders increased bets that the BoE could cut rates again as early as March. ING now expects two further cuts by June, a slightly more dovish view than the broader consensus.

“By March, however, the Bank will have had a further two jobs reports and, assuming the current benign wage growth trends continue, we think it will have enough evidence to cut rates again,” ING said.

“By June, we should have had inflation data showing headline CPI back at 2% or even below, which should spur one final cut that month, leaving Bank Rate at 3.25%.”

The near-term outlook for sterling therefore hinges on whether the labour market continues to cool in an orderly fashion or begins to deteriorate more rapidly. One or two additional rate cuts are unlikely to be a major problem for the pound, but a sharper slowdown in jobs and growth would risk markets pricing in a deeper easing cycle, which would weigh more heavily on the currency.