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UK wages data in focus in a key week for rate cut expectations

an array of different denominations of sterling

In the absence of the US yesterday due to the Martin Luther King Day holiday, European stocks drifted lower, dragged down by comments from several ECB policymakers who pushed back strongly on the idea of rate cuts during the first half of this year.

We heard from Bundesbank President Joachim Nagel who said that markets were too optimistic about the prospect of rate cuts, and that it might be the summer before the topic is discussed. We also heard from fellow hawk, Austrian ECB member Robert Holzmann was less cautious arguing that markets shouldn’t count on rate cuts in 2024 at all, and that he doesn’t see a “real recession coming”, making one wonder what data points he’s been looking at these past few months.

Nevertheless, the comments prompted a sharp 8 bps rise in German 2-year yields.

As we look towards today’s European open, and a weaker one at that due to a slide in Asia markets, the focus is set to shift to the UK economy which has managed to look slightly more resilient than some of its European counterparts over the last few months.

As we look towards today’s wages data, the next few days has the potential to shift the dial on the timing of when we might see the first rate cut from the Bank of England.

While inflation is the central bank’s primary mandate, we also know from recent comments from senior policymakers that wages growth is also a concern and that how quickly that starts to slow will play a key part in central bank deliberations on rate cut timing.

Today’s wages data for the 3-months to November is the first key test and while it is widely expected that the pace of wage growth will slow from the 7.3% in October, to 6.6% in November it is still likely to be perceived as uncomfortably high by historical standards.

Over the whole of 2023 wages have stayed grown consistently above 6.5%, although over the same period ILO unemployment has edged higher to be currently above 4%, although today’s data will continue to use an experimental series, further complicating the BOE’s assessment of the UK economy.

Even if we do see a sharp slowdown in wage growth as well as in tomorrow’s inflation numbers it shouldn’t be forgotten that at the most recent rate meeting the 3 external members of the MPC voted for another 25bps rate hike. While that call is not expected to be repeated at the upcoming February meeting the bar to voting for a rate cut is likely to be a high one given the fact that recent services PMIs have pointed to a solid end of year performance for UK PLC.

In yesterday’s German GDP numbers, we saw that the Germany economy contracted by -0.3% during the whole of 2023, and while the -0.1% contraction seen in Q3 was revised up to 0%, the German economy is still expected to have contracted by -0.3% in Q4, with little prospect of an uplift in 2024, against a backdrop of significant economic unrest across the country.

Today’s ZEW economic survey is for January is expected to feed into this negative sentiment with a further deterioration from December, with the expectations index expected to slow to 11.7 from 12.8. The current situation index is expected to come in unchanged at -77.  

EUR/USD – quiet session yesterday with 1.1000 currently capping the potential for further gains. Needs to move above 1.1030 to open the December peaks at 1.1140 Short term support still at 1.0875 and the 200-day SMA at 1.0830.

GBP/USD – needs to get above the highs last week at 1.2800 to maintain upside momentum. Still remains in the wider uptrend with support just above the 1.2600 area. We need to get above 1.2800 to target the 1.3000 area.

EUR/GBP – currently range trading with support just above the 0.8570/80 area and resistance at the highs last week at the 0.8620/25 area last week. Need to see break either side to signal the next move, with further resistance at 0.8670 and the main support at the December lows at 0.8545.

USD/JPY – needs to overcome resistance at the 50-day SMA and the highs last week at 146.40.  Support currently at the 200-day SMA now at 143.80. We need to push above last week’s high above 146.40 to keep 148.00 in sight or risk a return to 140.00.


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