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Pound Sterling defends gains registered against the Euro and the majority of G10 currencies in the first week of 2024, thanks to receding Bank of England interest rate cut bets.

The new week starts with the findings of a much-watched survey of the UK labour market revealing wage pressures remained elevated into year-end, tempering expectations that the Bank of England will imminently cut interest rates.

The REC/KPMG Report on Jobs survey revealed rates of pay growth picked up from November lows while also recording a slower fall in both permanent placements and temporary billings. The survey's permanent staff salaries index rose to 56.5 in December, from 56.0 in November. The permanent staff placements index rose to 45.6 in December, from 41.6 in November.

"The slowdown in our labour market seems to be easing a bit. Given that December is a time when employers generally postpone activity into the new year, this is a positive sign that the labour market is weathering the current economic storm," says Neil Carberry, REC Chief Executive. "Recruiters went into 2024 with hope that an upturn is coming, based on feedback from clients. Driving this economic growth would be a huge benefit for us all, leading to more successful firms, higher pay, and the ability to cut taxes and fund public services."

The Pound to Euro exchange rate rose 0.68% last week and is quoted at 1.1616 at the time of writing. The Pound to Dollar exchange rate is unchanged at 1.2717, having registered a small loss in the previous week.

Indeed, the Dollar was the top-performing major currency as 2024 got underway, with the Pound coming in a close second.

Key to this outperformance by Sterling and the Greenback is the easing in expectations for the scale of rate cuts due at both the Federal Reserve and Bank of England.

The Bank of England believes it will require a rise in unemployment and a notable wage decline to bring UK inflation back to the 2.0% target on a sustainable basis.

Only when the Bank believes inflation is on course for this target - and wages will be instrumental in this assessment - will it signal the need to cut interest rates.

The final quarter of 2023 saw the Pound underperform amidst a surge in market bets for Bank of England interest rate cuts, thanks to signs of rapidly slowing inflation.

But these expectations have been tempered of late, with the REC/KPMG jobs survey adding evidence to expectations wages will remain elevated, contributing to sticky inflation.

"We think investors are right to have tempered their expectations for interest rate cuts last week; we continue to look for only a 75bp reduction in Bank Rate over the course of 2024," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.

Pound Sterling can remain supported if rate cut expectations recede further from here.

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Despite some indications of job market resilience, the trend of easing labour market conditions is undeniable, confirming that 2024 will be the year in which the Bank of England can deliver some rate cuts.

Permanent placements and temporary billings declined again in December, albeit at softer rates than in November, as employers maintained a cautious stance regarding hiring amid the weaker economic climate.

Vacancies fell slightly for the third time in the past four months.

The supply of candidates meanwhile continued to rise sharply, despite the rate of expansion easing from November's near three-year record.

"Businesses are still making redundancies and pausing hiring due to a lacklustre economic outlook. This has driven a further decline in permanent job opportunities while we continue to see a rising number of people looking for new work," says Justine Andrew, Partner and Head of Education, Skills and Productivity at KPMG UK.

However, competition for suitably skilled workers remained a key factor pushing up rates of starting pay again in December.

The net balance of recruiters reporting that salaries are rising for new hires remains consistent with a sharp slowdown in year-over-year growth in average weekly earnings to about 3% by the end of this year, according to Pantheon Macroeconomics.

"This balance looks more credible, following the recent sharp slowdown in month-to-month growth in both the official measure of wages and the PAYE measure of median pay. That said, businesses still are preparing to lift wages substantially this year," says Tombs.

The Bank of England's Decision Maker Panel survey measure of firms' expectations for the increase in wages over the next 12 months picked up to 5.4% in December from 5.1% in November.

Tombs also cites Sainsbury's decision to increase its minimum hourly wage by 9.1%—almost in tandem with the 9.8% increase in the National Living Wage despite already substantially exceeding it—indicates that low-wage employers still are competing fiercely for staff.

"All told, then, year-over-year growth in average weekly wages excluding bonuses likely won’t fall below 6% until May and probably still will exceed 4% by the end of this year," says Tombs.

This will mean a more gradual rate of interest rate cuts than investors had expected when heading into the new year.

Pound Sterling can remain supported if rate cut expectations recede further from here.