Sterling took a significant dip, reaching a three-month low against the U.S. dollar as recent data indicated a deceleration in wage growth alongside a slight increase in unemployment in the UK. The currency was down 0.5% at one point, trading as low as $1.2806, its weakest point since mid-August, and settled around $1.2814. In contrast, the dollar continued its ascent on global markets, bolstered by optimism surrounding U.S. President-elect Donald Trump’s economic policy intentions.

The pound’s dip reflects a variety of domestic and international pressures, including new data from the UK’s labor market, a persistently strong dollar, and fears of protectionist U.S. trade policies that could impact Britain’s post-Brexit economic landscape. Sterling also slipped against the euro, with the single currency edging up by 0.2% to 82.97 pence, underscoring the broad-based impact of recent developments on the pound.

UK Wage Growth Decline and Rising Unemployment

According to the Office for National Statistics (ONS), UK wage growth—excluding bonuses—fell in the third quarter to levels last seen more than two years ago. This unexpected slowdown in wages raised concerns about the health of the British economy. Meanwhile, UK unemployment rose modestly to 4.3% in September, up from 4.1% the previous month. However, the ONS cautioned that low survey response rates could impact the reliability of recent figures.

Economists have pointed to several contributing factors for the downturn in wage growth. Many sectors are experiencing reduced demand and high costs, partly due to supply chain disruptions that have lingered since the COVID-19 pandemic. Additionally, inflation has eaten into real wages, diminishing workers’ purchasing power.

“The easing in private sector regular pay suggests that the Bank of England will continue to cut interest rates gradually,” said Paul Dales, chief UK economist at Capital Economics. This analysis reflects a shift in the Bank of England’s priorities as it seeks to balance supporting a fragile labor market against tackling persistent inflation. As wage growth slows and the job market loosens, the Bank may feel less pressure to keep rates high, possibly signaling more cuts in the near future.

Impact of Trump’s Victory and U.S. Dollar Strength

The pound’s decline has also been driven by the U.S. dollar’s ongoing surge, which gained additional momentum following Donald Trump’s victory in the U.S. presidential election on November 5. The dollar index, which measures the dollar’s value against a basket of six major currencies, was up 0.29% to 105.73 as of Tuesday and has climbed approximately 2% since Trump’s win.

Trump’s protectionist policy proposals, such as imposing tariffs of 10-20% on imports, have stirred concerns among economists and investors alike. Trump has also floated the possibility of tariffs as high as 60% on goods from China, a policy that could disrupt global trade flows. Such measures would likely raise costs for European exporters and affect the profitability of UK companies with exposure to the U.S. market.

Despite the pound’s slide, it has weathered Trump’s election better than the euro, which fell roughly 2.8% in the immediate aftermath. Since Britain voted to leave the European Union in 2016 and officially exited in 2020, the UK economy has been increasingly vulnerable to trade-related shocks and currency fluctuations, adding urgency to the government’s efforts to establish stable trade relationships outside the EU.

Potential Implications for UK Monetary Policy

The combination of slowing wage growth, rising unemployment, and the strong U.S. dollar adds complexity to the Bank of England’s already delicate position. Over the past year, the Bank has been gradually reducing its interest rates in response to persistent inflationary pressures and economic uncertainty, marking a notable shift after a prolonged period of rate hikes intended to curb rising prices.

As the pound depreciates, it adds inflationary pressures by increasing the cost of imported goods. However, with domestic wage growth weakening and the labor market softening, the Bank may prioritize economic support over inflation control. Analysts suggest that if the pound’s decline continues, it could push the Bank to cut rates sooner than anticipated.

Mark Dowding, Chief Investment Officer at BlueBay Asset Management, remarked that “sterling looks vulnerable” given the current economic headwinds and a strong dollar. He also noted that the UK economy, despite its resilience, is under considerable pressure from high inflation and a lagging post-Brexit economic recovery, which leaves the pound susceptible to future downturns.

Trade Concerns Post-Brexit and Impacts of Potential U.S. Tariffs

Trump’s proposed tariffs add another layer of uncertainty to the UK’s post-Brexit trade environment. While the UK has managed to secure trade agreements with countries like Japan, Australia, and the EU, its trade policy remains in flux as it seeks a free trade deal with the United States. The prospect of U.S. tariffs could jeopardize these efforts, especially if Trump’s policies deter American firms from investing in the UK.

The UK’s trade relations with the U.S. are critical given the size of the American market and the strong bilateral trade in goods and services. In the middle of 2024, the UK ran a small trade surplus in goods with the United States, a positive indicator for British exports, which are essential for offsetting the country’s overall trade deficit. However, Trump’s protectionist agenda could challenge this balance.

UK-based companies, particularly those in manufacturing and technology, may face added pressure if U.S. tariffs disrupt transatlantic supply chains. This impact would be amplified for companies already grappling with inflation and high energy costs, leading to potential job cuts and reduced output.

Global Market Reactions and the Euro’s Performance

As the dollar strengthens, other major currencies, including the euro, have also been under pressure. On Monday, the euro hit a 2.5-year low against the dollar amid investor concerns about the EU’s economic resilience in the face of protectionist U.S. policies. This adds further strain on the eurozone, where inflation remains high and economic growth prospects are subdued.

Sterling’s drop against the euro reflects a shifting landscape for European currencies, with both the UK and the EU grappling with economic challenges. For the UK, a weaker pound might offer a slight competitive edge to British exporters, but any benefits could be negated by higher import prices and increased inflationary pressures.

Future Outlook for the Pound and UK Economic Policy

Given the UK’s current economic headwinds, including rising energy costs, supply chain challenges, and a slowing labor market, the outlook for the pound remains uncertain. If the Bank of England moves to cut interest rates, sterling could depreciate further, potentially reaching new lows against the dollar and euro.

For UK businesses, the prospect of a weaker pound presents both opportunities and challenges. Exporters might benefit from improved price competitiveness abroad, but importers will face increased costs, adding to inflation and potentially dampening domestic demand. The UK government may need to consider targeted support for industries most affected by these pressures, particularly those that rely heavily on imported raw materials and goods.

In the broader context, the pound’s performance in the coming months will likely be shaped by external factors, including U.S. trade policies under Trump’s administration, global inflation trends, and investor sentiment around the UK’s economic outlook post-Brexit. For now, the pound remains under pressure as it navigates a complex web of domestic challenges and global economic shifts.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

12th November, 2024