Sterling Falls after Weak Wage Growth

PAPHOS, Cyprus - June 14, 2017 - PRLog -- Sterling Falls after Weak Wage Growth

Sterling dropped on news that wage growth in the UK was weaker than expected. According to data published by the Office for National Statistics (ONS), average earnings grew by 1.7% year-on-year in the three months to April, which is much less than the UK's inflation, currently at 2.9%, and signalling effectively a tightening in UK household budgets. The Conservatives said that the UK Brexit negotiating team will be ready to meet its EU counterpart on 19 June. Theresa May will be meeting the leader of the Democratic Unionist Party (DUP) to resume the talks on forming a minority government.

In the US, investors and traders are waiting to hear the Federal Reserve's (Fed) announcement regarding the raise in its benchmark interest rate and Janet Yellen's plans on shrinking the Fed's balance sheet, which has expanded considerably in the last few years. Yellen's remarks on the Fed's press conference are expected to influence world markets today.

Pound Sterling – UK Markets

Today, Sterling lost ground against the Euro and the US Dollar. The Sterling to Euro exchange rate was set at €1.13. The Pound lost 0.13% in value against the US Dollar, trading at $1.27.

Sterling has dropped against the Euro and the US Dollar, when the Office for National Statistics (ONS) released data regarding the UK's unemployment rate and average earnings for April. The UK's official jobless rate remained stable at 4.6% in April, which is a 42-year low. It seems, though, that the link between wages and unemployment has broken down, since the wage data was rather disappointing.

The wage growth was measured at 1.7%, which is considerably below the 2.7% UK inflation in April. This means that, although labour scarcity should have driven earnings up, the weak wage growth is squeezing UK households' budgets. The fall in the real wages will affect the country's economic growth since the citizens' purchase power is weakening.

US Dollar – US Markets

The US Dollar remained stable against the Euro with the exchange rate set at €0.89. Investors and traders have shifted their attention to the Fed announcing its monetary policy decisions.

Economists are certain that the Fed will announce the hike of its benchmark interest rate to a target range of 1% to 1.25%. Despite the rate hike, analysts believe that their expectations for a further rate increase until the end of 2017 are fading. A press conference by the Fed's Chair Janet Yellen is expected to provide clues on the Fed's $4.5tn balance sheet.

Yellen's plan is to begin shrinking the balance sheet this year by scaling back a program to replace Treasury and mortgage securities as they mature. Inflation data due to be released in the afternoon are expected to show that May core inflation was running at a rate of 1.9%.

Euro – European Markets

The Euro retained its value against the US Dollar, trading at $1.12. Analysts anticipate that the pair will be affected by the announcements coming from the US Federal Reserve regarding the hike of its benchmark interest rate and the shrink of its balance sheet.

The Spanish finance minister, Luis De Guindos, called for the creation of a powerful European treasury and a mechanism to force through labour and other kind of reforms in Eurozone member states. De Guindos said that "there is a pervasive perception that there are flaws in the eurozone that we have to correct." The Spanish minister's opinion is in line with the position set out by the new French president Emmanuel Macron, who has asked for a series of reforms that will modernise Eurozone institutions and make them more competitive in the global market.

During a speech at the Bundesbank Policy Symposium, the president of Bundesbank and member of the European Central Bank's (ECB) council, Jens Weidmann, said that the ECB is at risk of coming under political pressure to keep its policy loose in order to benefit Eurozone states' budgets.

Other Currencies – Highlights

The Sterling to Australian Dollar exchange rate dropped 0.45%, and is set at 1.68 AUD. According to a research done by Macquarie Group, which is the largest investment bank in Australia, banks are prepared to lend 25% more money than their US or UK counterparts. Despite the rapid decline in the maximum amount of money that a potential home buyer can borrow from a bank since 2015, the borrowing capacity of the Australian banks remains still above the 2011 levels.

The Pound weakened against the New Zealand Dollar, trading at 1.76 NZD. The Kiwi suffered a blow when data regarding a smaller-than-expected first quarter current account surplus was released. Economists were predicting a surplus of $922m in the first three months of 2017, while the real surplus turned out to be $244m. Data also showed that food prices rose at their fastest annual pace in more than six years mainly because of the bad weather conditions in New Zealand. GDP data for the first quarter of 2017, due to be released later today, will certainly affect the Kiwi.

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