Pound holds ground despite slowest wage growth in over three years

The pound is recovering, rising 0.17% against the US dollar after two straight days of losses.

The pound’s gains come despite the slowest average earnings growth in nearly three-and-a-half years and the largest increase in employment in over three years. Add to that the lowest claimant count in four months.

The Average Earnings Index plus Bonus, slowed to 4.0% in the three months ended in July, the slowest pace of growth since November 2020.

This reading was down from 4.6% previously and below expectations of 4.1%. In the same period, the labor market added 265K jobs, the highest since May 2022 and above expectations of 115K. Also, in August, jobless claims rose by 23.7K, which was below expectations of 95K.

Despite the significant slowdown in wage growth, the main source of upside risks to inflation, I do not believe that it will accelerate the pace of interest rate cuts by the Bank of England, which is expected to be relatively slow. This hypothesis is supported by the rise in gilt yields at the opening of today.

The focus now turns to the GDP reading and the performance of various sectors tomorrow for July. In addition to anticipating the CPI and PPI data from the United States. These figures also come ahead of the meetings of the Federal Reserve and the Bank of England next week.

In the United States, too, last week witnessed a series of negative numbers from the labor market, which kept the pressure on bond yields to record further declines.

The narrative that arises from data from both economies is also pushing the yield gap between British gilts and US Treasuries to widen further after reaching positive territory for the first time this year in August.

While further widening of the yield gap in favor of UK gilts would provide further support for the pound to renew its strong gains against the dollar.