Pound Momentum Surges Amidst Rising UK Wage Growth

The British pound strengthened, lifted by unexpected wage growth, casting doubt on Bank of England rate cuts next year. UK government bond yields rose significantly, contrasting with minor increases in other regions. Despite currency gains, economic contraction and labor market weakness hint at potential challenges ahead.

The British pound saw an uptick on Tuesday, buoyed by new data indicating an unexpected rise in UK wage growth for the three months ending in October. This development suggests the Bank of England may reconsider rushing into rate cuts next year.

Official statistics revealed a 5.2% increase in average weekly earnings, excluding bonuses, surpassing the anticipated 5.0% rise. As expectations lean towards the Bank of England maintaining a 4.75% rate this week, traders speculate on significant rate cuts next year, contrasting with forecasts for the US Federal Reserve and the European Central Bank.

This 'higher for longer' approach has fortified the pound, making it the top-performing major currency against the dollar in 2024. Yet, with economic contraction and labor market slowdowns, the potential for rate adjustments by the Bank of England is increasingly plausible, according to XTB's Kathleen Brooks.

(With inputs from agencies.)