Pound rallied on Monday after news emerged that average wages in the UK continued to rise at an almost unprecedented rate. However, this puts further pressure on the Bank of England in terms of interest rates, forcing it to consider another increase at its meeting scheduled for next month.
Reportedly, average household income excluding bonuses was 6.4% higher in the last three months to November 2022, which is the biggest increase since records began in 2001, not counting the peak of the coronavirus pandemic. This indicates that the labor market remains too challenging for the central bank, especially since inflation could hit double-digits if wages continue to rise at the current rate.
In a bid to prevent an inflationary spiral, the central bank raised rates from 0.1% to 3.5% late last year and is expected to announce a further 50 basis point increase as early as February. However, labor shortages in the UK pushed unemployment to fall to a record low below 4%, giving workers unprecedented market power. The pressure was most acute in the private sector, where wages rose by 7.2%. In the public sector, growth was only 3.3%, well below the current inflation rate of 10.7%. The decline in living standards has triggered a wave of strikes in recent months as workers insist on wage increases to offset inflation. Wages are also reported to have fallen by 2.6% compared to last year instead of rising at the end of December.
According to reports, the number of new vacancies fell by 75,000 to 1.16 million in December. This suggests that employers are starting to lay off workers as the economic situation worsens. The rate has jumped to 3.4% per thousand employees in the three months to November, up 1.1% from the previous three-month period. The Bank of England's latest forecast says the unemployment rate will exceed 6% over the next three years.
Going back to GBP/USD, attempts to get out of the horizontal channel have been unsuccessful. Now, buyers need to stay above 1.2160 in order to maintain their advantage. A breakdown of 1.2225 will push the pair to 1.2300 and then towards 1.2350. Meanwhile, sellers taking control of 1.2160 will lead to a decline to 1.2090.
As for EUR/USD, there is a chance of further growth, but buyers have to hold above 1.0810. That will spur the pair to rise to 1.0840 and 1.0885. Meanwhile, a decline to 1.0810 will put pressure on the pair, bringing it towards 1.0755 and 1.0720, or possibly to 1.0685.
