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Sterling ticks lower as wage growth expectations ease

Sterling ticks lower as wage growth expectations ease

LONDON (Reuters) – The pound softened versus the euro on Thursday ahead of a European Central Bank meeting and after data showed a fall in British businesses’ expectations for wage growth in the coming year.

The euro was last up 0.12% on sterling at 85.09 pence, though still at the weak end of its recent range, after May saw the British currency strengthen against most major peers, as hotter-than-expected services inflation caused markets to give up on expectations of a June Bank of England rate cut.

Versus the dollar, the pound was a touch softer down 0.07% on the day $1.2784, but close to Tuesday’s two and a half month top of $1.2818.

The main British macro news of the day was the release of a Bank of England survey showing British businesses’ expectations for wage growth over the coming year fell sharply last month to 4.1% in May from 4.6% in April, while on a three-month average basis, the measure fell to 4.5% from 4.8%.

Both were the lowest since the current series started in May 2022, and may ease policymakers’ worries that it will be hard to keep inflation on target and make it easier for them to cut interest rates.

Market pricing currently reflects expectations of one or two 25 basis point Bank of England rate cuts this year, with the first most likely to come in September.

So far the British election, due 4 July has had fairly little effect on the pound, though the election was announced the same day as the hotter-than expected inflation data.

Polls are currently pointing to a large majority for the opposition Labour Party, an outcome analysts at MUFG said in a Thursday note would be positive for the British currency.

“It (a Labour landside) would lead to political stability and would raise expectations in the market of increased fiscal spending.”

“It would potentially reduce BoE rate cut expectations given the increased expectations of fiscal spending and over the medium-term would put the Labour Party in a better position to tackle the thorny Brexit topic in order to try and reduce frictions and improve relations,” they wrote.

The main event in markets Thursday is the ECB policy decision. A rate cut is all but certain, but markets will be watching to see what President Christine Lagarde says about their future path.


(Reporting by Alun John; Editing by Toby Chopra)


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