Sterling gets a lift from hotter UK wage growth

By Amanda Cooper

LONDON (Reuters) - The pound rose on Tuesday, supported by data that showed UK wage growth picked up more than expected in the three months to October, which in turn raises the chances that the Bank of England will not rush to cut rates next year.

Average weekly earnings, excluding bonuses, were 5.2% higher in the three months to the end of October than a year earlier, the Office for National Statistics said.

A Reuters poll of economists had mostly forecast a rise of 5.0%.

Sterling was last up 0.1% at $1.2693, having bounced from an earlier session low of $1.26685.

The BoE will announce its decision on monetary policy on Thursday and markets expect rates to remain at 4.75%. Looking further out, money markets show traders expect the BoE to cut rates by around 70 basis points next year, compared with expectations for roughly the same scale of cuts from the U.S. Federal Reserve and around 120 bps in cuts from the European Central Bank.

The "higher for longer than elsewhere" theme has been a key driver of sterling strength this year, meaning the pound is the best-performing major currency against the dollar in 2024.

Even though it has fallen 0.3% in the year to date, it is still well ahead of the offshore Chinese yuan, the runner up, with a loss of 2.3%. Against the euro, the pound is up around 4.5% in 2024.

Benchmark 10-year UK government bond yields have risen by almost a full percentage point this year, compared with a 54-bps rise in 10-year Treasuries and with a 20-bp rise in German 10-year yields.

That said, there are cracks appearing in the UK economic picture. Recent data has shown the UK economy suffered a second month of contraction in October, while the employment market is weakening, with employers cutting staffing and job vacancies dropping.

"In the longer term, although wage data was stronger than expected, we think that the economic backdrop is weakening, which will lead to a loosening of the UK labour market over the course of 2025," XTB research director Kathleen Brooks said.

"Thus, there is a risk that the market is currently underestimating the chance of rate cuts from the BOE next year," she said.

(Reporting by Amanda Cooper; Editing by Christina Fincher)