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The British Pound was softer against the Euro and Dollar after the release of UK wage data that hints the labour market continues to cool and will help bring down inflation over the coming months, in line with the thinking at the Bank of England.

UK wages increased, with bonuses included, rose 8.1% in the year to August, said the ONS, which was below expectations for 8.3% and down on July's 8.5%. The result includes one-off payments to some NHS workers, which will fall out of upcoming releases and therefore hints at a further softening in wage pressures ahead.

Wages without bonuses increased 7.8%, which was as expected. The ONS has delayed the release of unemployment figures until October 24, limiting the market-moving potential of today's release.

Nevertheless, softening wage figures are likely to be the day's main story, given their impact on inflation, and the key takeaway here is that the labour market is easing. "Wage growth is slowing quickly enough for the MPC to keep Bank Rate at 5.25% next month," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.

Sterling fell against all its G10 peers except the New Zealand Dollar (which was stung by soft Kiwi inflation data): The Pound to Euro exchange rate fell a quarter of a per cent on the day to 1.1540, the Pound to Dollar exchange rate was seen down 0.40% at 1.2167.

"Markets are exceptionally data-dependent, reacting sharply to economic or inflation numbers that do not come in line with expectations, hence the pound’s negative reaction to the sign of a cooling labour market. The pound has weakened mostly due to markets paring back expectations of Bank of England’s rate hikes," says George Vessey, Lead FX Strategist at Convera.

"With the Bank of England last month choosing to hold the interest rate at 5.25% in the face of falling inflation, this data, alongside next week’s delayed figures, will play a significant role in its rate decision on the 2nd November," says Richard Carter, head of fixed interest research at Quilter Cheviot.

Carter says higher interest rates may lead to a plateauing of wage growth, given that businesses will not have the surplus funds to sanction significant salary increases.

"Furthermore, with the continued financial uncertainty, employees might tread cautiously when it comes to negotiating for pay hikes for fear of becoming too expensive to keep on," he adds.

One yardstick of labour market performance that was not impacted by the ONS delay was the payroll measure, which fell marginally in September for the third month in a row.

According to Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, the trend in employment looks roughly flat, and the labour market remains relatively resilient.

"While the 21% year-over-year drop in job vacancies in September is consistent with employment falling at a 1% year-over-year rate, the continued low level of redundancy notifications in recent weeks paints a much more resilient picture," he says.

Image courtesy of Pantheon Macroeconomics.

Nevertheless, Pantheon Macroeconomics expects UK unemployment to continue to rise over the coming months, as the workforce continues to grow, resulting in an unemployment rate rise to a peak of 4.8% in Q1 2024.

"This profile should be slow enough for the MPC to keep Bank Rate at 5.25% until next spring, and then to reduce it to about 4.50% by the end of 2024," says Tombs.

For the Pound, all eyes now turn to the inflation numbers due midweek.

"The main event is tomorrow's services inflation data - and it would probably take a big upside surprise there to unlock a November hike," says James Smith, UK Economist at ING Bank.

Chris Turner, FX Strategist at ING, says the Pound was slightly lower against the Euro following the wage data release, "and given that the market still prices in 18bp of further tightening in this cycle, it looks like EUR/GBP can grind towards 0.8700 - should tomorrow's release of September CPI also point to a benign outcome."

EUR/GBP at 0.87 equates to a GBP/EUR conversion of ~1.15.