Updated March 13th, 2024 at 11:06 IST

UK economy transitioning toward Sterling tailwinds despite wage data fluctuations

Sterling experienced a slight dip to around $1.277 following the release of wage growth figures, which slowed marginally to 6.1% in three months to January.

Reported by: Business Desk
UK flag | Image:Pexels
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UK economy: Despite recent fluctuations spurred by wage data, the UK economy appears to be gaining momentum, prompting investors to anticipate prolonged higher interest rates by the Bank of England compared to its global counterparts.

Sterling experienced a slight dip to around $1.277 following the release of wage growth figures, which slowed marginally to 6.1 per cent in the three months to January. 

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However, proponents of a bullish stance on sterling remain undeterred, citing a robust employment market and ongoing economic recovery from recessionary pressures.

Despite the minor setback, the pound has still managed to maintain a 0.4 per cent increase against the dollar this year, largely driven by the allure of higher interest rates in the UK, rendering British bond yields more appealing and bolstering the currency's value in contrast to the euro, yen, and Swiss franc.

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Kamal Sharma, senior G10 FX strategist at Bank of America, is optimistic about sterling's trajectory, foreseeing a rise to $1.37 by year-end. 

He points to several factors contributing to this optimism, including resilient labour market conditions, boosted real incomes from falling headline inflation, and upcoming increases in the national minimum wage slated for April.

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The recent budget announcement, featuring additional cuts to labour taxes and upward revisions in growth forecasts by the UK's public finance watchdog, has further stabilised financial markets, allowing investors to refocus on economic fundamentals and the comparative monetary policies of central banks.

While wage growth remains robust and survey data hints at an economic rebound, interest rate derivatives suggest that the Bank of England is likely to maintain rates at 5.25 per cent until August, contrasting with potential cuts anticipated for the European Central Bank and Federal Reserve.

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Althea Spinozzi, rates strategist at Saxo Bank, warns of upward pressure on Gilt yields due to high government borrowing and the Bank of England's active bond selling. She highlights the possibility of accelerated sell-offs if inflation persists or rebounds, coupled with increased Gilt issuance.

However, despite the prevailing optimism, the outlook remains uncertain. 

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The UK economy still faces challenges, and inflation is projected to dip below 2 per cent in the near term amid declining energy prices. 

Morgan Stanley economist Bruna Skarica suggests that expectations for a second-quarter rate cut may be underestimated, underscoring the volatility inherent in economic forecasts.

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(With Reuters Inputs)

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Published March 13th, 2024 at 11:06 IST