GBP/USD Sets New 2023 Highs after Strong Wage Growth in the UK

GBP/USD Analysis

Even though unemployment in the UK rose to 4% in the March-May period, the wage data of today's labor report are likely not going to be well received by the central bank. Total pay (including bonuses) grew by 6.9%, in the biggest increase in nearly two years. Regular pay (excluding bonuses) stayed at 7.3% and the highest levels outside the pandemic period.

High wages have been a constant headache for the Bank of England, since they do not help its effort to contain inflation and creates risk for a wage-price spiral. Core CPI had jumped to 6.8 y/y and the highest in more than thirty year, while headline inflation stood at 8.7% y/y. Just a day earlier, Governor Bailey spoke of "unacceptably high" inflation and warned that price and wage increases are "not consistent" with the 2% inflation target.^[1]

Given the high cost of living and tight labor market with elevated earnings, policymakers were forced to reaccelerate the pace of tightening in June. They raised rates 50 basis points, in what Mr Bailey described as a "really strong move" a few days earlier at ECB's forum in Sintra ^[2]. Officials remained not-committal around the next steps, but today's jobs report makes it hard for them to back down.

GBP/USD got a lift after the release and tests 1.2900 for the first time in more than a year. It tries to take out 1.2948, although fresh impetus will be needed for tackling 1.3167. On the other hand, the RSI hovers around oversold levels, which could contain the advance and put pressure on the pound. Strong catalyst would be required though for a breach of the 1.2650-00 region.

Wednesday's US CPI inflation report looms large and could determine the pair's next leg. Inflation has been easing and the Fed had paused its rate hiking cycle in June. However, it remains far form target and officials have pointed to more moves ahead. Markets price in a 0.25% rate increase this month.