FX Focus: Pound's gains trimmed by slower wage growth

The pound endured a rollercoaster session on Wednesday (15 March), gaining sharply before mixed news on the state of Britain's labour market put the currency on the back foot again.

Sterling was the best performer in the G10 this morning, climbing as high as $1.2234, before slipping sharply and relinquishing most of the gains. By early afternoon, the UK currency remained 0.25% and 0.14% higher against the dollar and the euro respectively, trading at $1.2187 and €1.1472.

According to the Office for National Statistics (ONS), the unemployment rate in the final quarter of 2016 fell to a 42-year-low of 4.7%, but basic salaries grew just 2.2% in the period, down from a 2.6% gain in the previous month and falling short of forecast for a 2.4% reading.

Lower wage growth, in turn, hurt the pound as it eased fears the Bank of England might raise interest rates soon.

"The average earning index data has missed the forecast [and] this is not a good news for the currency traders," said Naeem Aslam, chief market analyst at Think Markets UK.

"It is vital that average earning index should start to tick higher as the trend is clearly telling us that we are not improving at all. This could have a serious impact on the economy and on consumer behaviour."

Meanwhile, a report suggesting that the European Union could force the UK to wait until June to start the Brexit talks did little to ease the uncertainty surrounding Britain's exit from the EU. FXTM research analyst Lukman Otunuga warned the ongoing political impasse was likely to result in more losses for the UK currency.

"Investors should be prepared for a chaotic rollercoaster ride when dealing with sterling as the Brexit developments, political risk and overall uncertainty sparks explosive levels of volatility," he explained.

"With the ongoing Brexit woes effectively strengthening the relationship between uncertainty and sterling, further downside losses should be expected."

Will the US hike its interest rate?

Across the Atlantic, the dollar was firmly on the back foot as investors awaited tonight's Federal Reserve meeting, when the US central bank is widely expected to announce it will hike its benchmark interest rates.

The greenback was 0.13% and 0.17% lower against the Swiss Franc and the Canadian dollar respectively, trading at CHF1.0089 and CAD$1.3456. Broadly flat against the euro, the dollar also slipped against its Australian counterpart and the yen, losing 0.24% and 0.11% respectively, to AUD$1.3187 and ¥114.62.

According to the market, the chances of a rate hike stand at 94%, which means investors could be in for a shock, should the Fed opt to hold fire.

"The upside on the hike itself looks very limited which means we're relying on the dot plot and Janet Yellen if we're going to see much of a strengthening in the US dollar or Treasury yields," said Oanda's senior market analyst Craig Erlam.

A rate hike now and another in June would certainly leave the door open to four increases and stop the Fed falling behind the curve if the US economy does respond strongly to either [US Predident Donald] Trump's stimulus plans – should they be enacted this year – or the prospect of them.