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Sterling Hovers Near 2-Week Low As Wage Growth Dips

Sterling hit a new two-week low on Tuesday as British employment data showed wage growth in the quarter ending March was lower than expected, signalling the possible start of a turbulent period for the broader economy.

Wages in Britain had grown at strong rates over the past year or so but slowed to 3.2 percent in the first quarter of 2019, data showed, lower than predictions of 3.4 percent and down from the previous reading of 3.5 percent.

The data also showed employment growth slowed to 99,000, well below a median forecast of 135,000 in a Reuters poll of economists.

Sterling slipped on Tuesday to a two-week low of $1.2909, down 0.3 percent on the day. It was also slightly down against the euro at 86.80 pence.

“UK wage growth is close to post-crisis highs, but some tentative early warning signs suggest that the jobs market is entering a turbulent period,” said James Smith, an economist at ING.

ING economists do not expect a rate hike from the Bank of England this year, even though recent comments from Governor Mark Carney suggest a November move should not be ruled out.

The Bank of England has said in the past that a rate hike would be contingent on strong wage growth pushing up inflation.

Money markets expect one rate hike in the first half of 2020.

Any further hits to wage growth and employment numbers could also be a sign that British businesses are hurting from uncertainty over Brexit, analysts said.

While most economic data in Britain has been solid in recent months even in the face of messy EU divorce proceedings, the worry for investors is that months of inventory stockpiling by British firms could show up this quarter.

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On Brexit, Labour’s second most powerful man, finance chief John McDonnell, said a customs union was absolutely key for the party and there was not yet a deal.

This led some to conclude that a cross-party deal between Labour and the Conservatives is looking even more unlikely.

“Him saying that a customs union is key for a compromise deal to be reached further highlights that these talks are going to ultimately fail,” said Lee Hardman, a currency analyst at MUFG Securities.

“This weekend we have the upcoming EU elections which are expected to deliver another damning verdict on the government’s popularity.”

The British currency is also being dragged lower by the broader environment, with trade tensions between the United States and China hurting stocks.

“Given the overriding environment, interest rates on the floor, and even if we have got a slightly firmer wages number, we could see a brief counter-trend move here in sterling and sterling interest rates because of the overall environment,” said Chris Turner, head of FX strategy at ING.

He said that a strong number could push Bank of England rate hikes expectations up a little more but given the overriding environment he said he doubts investors will go too far down the “normalisation” road.

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