Pound jumps to monthly high after wage shocker, US inflation data

LONDON: The pound rose to its highest in over a month on Tuesday as strong wage growth heaped pressure on the Bank of England to keep raising interest rates while the dollar fell after data showed U.S. inflation cooled sharply last month.

Sterling rose as far as $1.261, its highest since May 11, and was last up 0.72% at $1.26.

Data from the Office of National Statistics (ONS) showed UK wages in the three months to April grew at their fastest pace on record, excluding during the pandemic, at a clip of 7.2%, after an increase in the national minimum wage.

The BoE meets next week to discuss monetary policy. With inflation running above 8% and households and businesses grappling with a cost-of-living crisis, the central bank must contain price growth without triggering a recession.

In the United States, consumer price growth eased in May to the slowest rate in more than two years, supporting expectations that the interest rate paths of the Federal Reserve and the BoE will diverge, with the former seen holding rates this week.

British two-year gilt yields rose as far as 4.847%, their highest since the 2008 financial crisis, surpassing the peak in September under Britain's shortest-serving Prime Minister Liz Truss following her largely unfunded mini-budget.

The euro was last down 0.15% at 85.85 pence.

"The market is saying the BoE is just going to have to keep raising rates," Michael Brown, a markets strategist at broker TraderX said.

"We’re going to end up with a much bigger interest-rate burden at a government level and at an individual level," Brown said.

Typically, there is a lag of several months between a central bank raising interest rates and the impact on the real economy. The effects of the BoE's series of rate hikes is now filtering through, especially as fixed-rate home loans come up for renewal.

A number of major lenders, including HSBC (HSBA.L), have withdrawn mortgage products for customers applying via broker services, reflecting the broader impact on Britain's housing market of higher borrowing costs.

Others, such as Nationwide Building Society, have raised their mortgage rates, along with NatWest (NWG.L) and Santander (SAN.MC), according to Britain's Guardian newspaper.

Jefferies interest rate strategist Mohit Kumar said gilts have come under pressure due to reports of lenders pulling deals and the uncertainty in modelling the impact of higher mortgage rates, particularly given the rise in near-dated gilt yields.

Kumar said the BoE was in a difficult position as "there is a large refinancing wave in the June to September period," which means the central bank may not have room to hike aggressively.

A 10-year UK gilt now yields more over 10-year U.S. Treasuries than at any point since early 2009, reflecting the extra risk premium investors demand to hold British government debt right now, theoretically giving the pound an edge.

Persistently high wage growth makes the BoE's task to get inflation back to its 2% target even more difficult, as it leaves less room to bring price pressures down.

"In the context of April's shock inflation print, this puts significant pressure on the Bank of England to increase rates again at next week’s policy meeting – another 25bp hike seems the most likely option," said Hussain Mehdi, macro & investment strategist at HSBC Asset Management.