Sterling Strategy: Weak wage growth - RBS

Research Team at RBS, suggests that the main focus of sterling FX markets is still on the EU Remain/Leave Referendum.

Key Quotes

“With a very light data calendar, sterling’s main focus stays on the UK EU Remain/Leave Referendum. Betting markets (Betfair) continued last week to price a higher implied chance that the UK votes to remain in the European Union. The overall shape of a number of opinion polls also suggested some hardening in support for a Remain outcome. In trade weighted terms, sterling has now clawed back around one-third of its November 2015 to April 2016 decline.

However, also key for GBP are more signs of softer economic performance with respect both to growth and inflation. Although UK Q1:16 GDP was left unrevised at 0.4% qoq, forward-looking indicators suggest weakness ahead.

Meanwhile, on the inflation front, pressure on the central bank to think about policy easing in future rather than tightening continues to build slowly. Last week’s key wage data provided further evidence that pipe-line price pressures remain benign. According to pay analysts XpertHR, pay awards in the three months to the end of April 2016 were worth just 1.7% at the median. This marks the first time in two years that the median pay award has shifted from 2%, and is the lowest level since the three months to the end of October 2012. This is all the more important as it coincides with the higher national living wage taking effect.

Moreover, April is the most important month of the year for pay settlements (two-fifths of pay deals are set in the month). Together this provides evidence that our long run theme of disinflationary forces is still very much in play. An implied lack of yield for GBP for the foreseeable future, in the context of a large current account deficit, suggests that the medium-term outlook for sterling is weaker once the dust settles post the Referendum.”