Sterling Rises on Strong Wage Growth, but Upside May Be Limited
Sterling is trading near a two-month high against the US dollar after UK jobs data revealed a sharper-than-expected rise in wage growth, reaching an eight-month high. This has pushed 10-year gilt yields higher as markets reassess the Bank of England’s (BoE) ability to contain inflationary pressures.
The three-month average weekly earnings y/y increased to 6.0% in December, surpassing expectations of 5.9% and up from 5.6% in November. Pay growth, excluding bonuses, climbed for a third consecutive month, driven largely by the private sector (6.2%). The BoE closely monitors this metric, as persistent wage inflation contributes to sticky services inflation. After adjusting for inflation, real wages also saw a slight increase. Meanwhile, the unemployment rate remained at 4.4%, defying expectations of a rise to 4.5%, while job vacancies continued to decline at a slower pace. These figures are likely to reinforce the BoE’s cautious stance as it weighs persistent wage pressures against the UK’s sluggish economic growth and ongoing job market adjustments.
As a result, expectations for BoE rate cuts have been scaled back slightly. Against the euro, sterling has broken out of a narrow trading range and may look to extend gains beyond €1.21, particularly given Europe’s political uncertainties. However, against the US dollar, sterling appears overbought, and a correction may be likely. While the 100-day moving average at $1.2666 could be tested in the near term, further upside may be limited.
Euro's Rally Faces Resistance Amid Political and Economic Uncertainty
After posting its second-best week of the year, the euro’s rebound from near $1.01 to $1.05 against the US dollar appears to be losing steam. While EUR/USD has broken out of its descending trend channel, in place since last October, technical indicators suggest it is now overbought. Additionally, European equities started the week cautiously as tensions between the US and Europe over Ukraine and tariffs escalated.
European leaders convened an emergency meeting in Paris on Monday to discuss security concerns, raising fears of increased government borrowing to fund military expenditures. This drove Germany’s 10-year bond yield to a one-month high of 2.5%, as higher spending could fuel inflation and push yields higher. Meanwhile, US-Russia negotiations on Ukraine are set to begin on Tuesday, with a successful outcome potentially driving oil prices lower, which could provide some support to the euro. However, while ceasefire prospects have bolstered risk appetite and the euro, concerns over US isolationism and European security risks remain a headwind for the currency.
On the monetary policy front, the European Central Bank is expected to cut interest rates by 25 basis points at each of the next three meetings, with the deposit rate potentially falling below 2% by 2026. While this would typically weigh on the euro, rising US inflation could shift the real rate differential in favour of further EUR/USD gains.
However, given the uncertain macroeconomic landscape—alongside geopolitical and tariff-related risks—EUR/USD's upside potential may be capped for now. A stronger domestic outlook and weaker US economic data would be needed to push the pair toward $1.06. Investors will closely watch Germany’s ZEW sentiment surveys today, with expectations for the index to rise to a six-month high.
