Sterling slips as pay growth cools
Sterling is trading on the back foot this morning after the release of UK labour market data. GBP/USD has slipped back from the $1.34 handle, while GBP/EUR remains capped below €1.14, highlighting ongoing resistance. The softer tone reflects investor caution as wage growth moderation reinforces expectations of further Bank of England (BoE) easing later this week.
Although the UK unemployment rate ticked to an over 4-year high, UK labour market data overall came in slightly hotter than expected. But amid ongoing reliability concerns the broader trend is more telling — and for inflation, that trend is clearly downward. The sharp slowdown in private‑sector wage growth, the BoE’s most important input, reinforces the view that inflation will continue to ease, supporting upside for gilts and downside for the pound.
Wage growth has long been a thorn in the BoE’s side, raising fears of a wage‑price spiral where higher pay demands feed back into inflation. But the latest data show clear moderation: annual growth in average private‑sector weekly earnings slowed to 3.9% in the three months to October, down from 4.2% previously. This marked the weakest pace since December 2020–February 2021. In contrast, public sector pay gains accelerated to 7.7%, the highest since July–September 2023.
While a BoE interest‑rate cut this week looks all but certain, markets appear heavily skewed toward expecting a dovish outcome. That positioning raises the risk of disappointment if the MPC leans hawkish, which could bolster sterling. Such a surprise could materialize through a narrow vote split, with hawks holding firm against further easing, or through cautious language in the statement that signals limited scope for additional cuts. In that scenario, investors would be forced to reassess the pace of the easing cycle, tempering expectations for aggressive loosening and potentially driving a short‑term rebound in the pound and gilt yields.
Euphoric euro meets downbeat dollar
The US dollar has started the new week still on the defensive, but the euro’s rally is running hot. The macro and policy backdrop remains complex as a heavy calendar of risk events kicks off. Yesterday saw October’s Eurozone industrial production rose 0.8%, lifting annual growth to 2.0% and supporting the common currency versus the beleaguered US dollar. The $1.18 mark is eyed to the upside this week.
After years of pressure from high energy costs, trade frictions, a stronger euro and rising Chinese competition, lower oil and gas prices and leaner inventories are finally supporting a cyclical Eurozone recovery. Structural headwinds remain, but the ECB is likely to frame this rebound as evidence that no further rate cuts are needed – a euro positive story.
Today’s PMI data will be pivotal. In the eurozone, the services PMI is expected at 53.3, while manufacturing is seen edging up to 49.9 — just shy of growth territory. Stronger‑than‑expected prints would reinforce the view that the ECB’s next move could be a hike, adding fuel to the euro’s advance. But the speed of the rally has already pushed EUR/USD close to technically stretched territory, with the RSI hovering just below 70. That raises the risk of consolidation or a short‑lived pullback, even if fundamentals remain supportive.
Still, the direction of EUR/USD will ultimately hinge on dollar dynamics. November payrolls, delayed by the government shutdown, are also due today with forecasts for a 50K gain and unemployment edging up to 4.5%. Disappointing figures would ramp up expectations for Fed cuts in 2026, weighing on yields and the dollar; a beat would pare those bets, lift the dollar, and cap the euro’s rally. Alongside payrolls, US retail sales and a slate of Fed speakers will provide further tests of demand and policy direction.
US jobs review
Markets face a pivotal week as US jobs and inflation data take centre stage. November payrolls are expected to show just +50k jobs, as government cuts drag the three‑month average down — underscoring labour market fragility. Softer prints could accelerate bets on a March Fed cut, currently priced at only 33%, and weaken the dollar while stronger data would bolster the buck.
As a reminder, the Fed’s decision to lower rates by 25 bps to 3.5–3.75% exposed divisions, with dissenters split between no move and a larger cut. The dot plot signals just one cut in 2026, but risks skew toward more if jobs weaken. Internal disagreements highlight uncertainty in the policy path, increasing market sensitivity to each data release. Plus, Powell has made clear the easing cycle is now driven by labour market weakness rather than inflation.
The bottom line is that expectations of Fed dovishness underpin a bearish dollar bias right now, but this hinges on validation from labour market data.
Japanese yen shows strength as BoJ looms
The Japanese yen has been one of the strongest performers in FX markets so far this week ahead of the all-important Bank of Japan decision on Friday.
USD/JPY has fallen 0.7% this week, with a crossing of the key 8- and 21-day moving averages signalling a potential trend change lower.
A break below 154.35 would provide further evidence of a shift into a downtrend.
GBP/JPY fell as much as 0.8% in the first day and a half of FX trading this week, while EUR/JPY dropped 0.6%.
Financial markets see a 94% chance of a rate hike on Friday. However, with only 30bps of further hikes priced in, any more aggressive commentary from Bank of Japan governor Kazuo Ueda could trigger sharper falls in JPY pairs.
Market snapshot
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: December 15-19
All times are in GMT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
