Unemployment in the United Kingdom fell unexpectedly between December and February, according to new data released by the Office for National Statistics on Tuesday. The bank has stressed it is looking for wage growth before rate hikes.
The pound gained more than 0.2% to $1.437, beating a previous post-Brexit-vote high set in January.
However, markets may be concerned that the drop in unemployment wasn't sufficient to boost overall wages already, which could signal a disconnect between employment levels and pay growth. "Pay growth appears to be finally benefiting from the strength of jobs growth", says Ruth Gregory, a United Kingdom economist at Capital Economics.
Average wages in Britain are rising faster than prices for the first time in about a year, official figures showed Tuesday, a development that will likely fuel expectations that the Bank of England will raise interest rates again next month.
The proportion of the labour force out of work fell to a new four-decade low in February, surprising economists who had expected the rate to stay steady.
Low-impact Eurozone construction output figures are the only other ecostats due for release tomorrow, which means that Pound Sterling could be left in charge of the GBP/EUR exchange rate, given the importance of the day's United Kingdom economic data. Despite failing to gain speed in the latest data, the headline total pay growth measure matched its strongest reading since mid-2015. "Markets are now pricing in an 85 percent chance of a rate rise". This saw the Pound-to-Dollar rate quoted 0.04% lower at 1.4336, marking a reversal of an earlier 0.22% gain, while the Pound-to-Euro rate traded 0.11% lower at 1.1567. The bank is tasked with setting policy to achieve an inflation rate of around 2 percent and updated figures due Wednesday are not expected to show much change in the annual rate in March. Since then, inflation has fallen faster than forecast, down from 3% to 2.7%, but the outlook for wage growth has firmed.
United Kingdom inflation data is predicted to show a small slowdown in month-on-month price growth from 0.4% to 0.3%, but an uptick in year-on-year core price growth from 2.4% to 2.5%, while overall price growth is expected to hold steady at 2.7%. What is clear however, is that a failure to raise rates in May will be bad for Pound Sterling.
"With the final piece now in place the Bank of England now has the catalyst to be able to follow through on its plans to raise interest rates at the next MPC meeting in May and start the move back towards monetary normality".