Pound Sterling falls back as weak UK labor data stokes BoE dovish bets.

The Pound Sterling gives up gains against its major peers on Tuesday after the UK labor market data showed weak labor demand.
UK labor demand remained weak as employers dissented from the government’s decision to direct them to higher NI contributions.
Traders see the Fed keeping interest rates steady in the next two policy meetings.

The Pound Sterling (GBP) surrenders its marginal gains against its major peers on Tuesday in the aftermath of the United Kingdom (UK) labor market data for three months ending November. The initial reaction from the British currency was positive after the Office for National Statistics (ONS) showed that the wage growth accelerated, with Average Earnings Excluding Bonus rising at a robust pace of 5.6%, faster than estimates of 5.5% and the former 5.2%.

Average Earnings Including Bonus also rose by 5.6%, as expected, faster than the 5.2% growth in three months ending October. However, the labor growth remained significantly weak, with a fresh addition of 35K workers against the former reading of 173K, which limited the Pound Sterling’s upside.

Also, the ILO Unemployment Rate rose to 4.4%, higher than estimates and the prior release of 4.3%. Weak labor growth clearly shows employers’ discontent with the government’s decision to increase their contribution to National Insurance (NI).

Bank of England (BoE) officials closely track wage growth data when deciding on interest rates, as wage growth is a major contributor to inflationary pressures in the UK service sector. Technically, stronger-than-expected UK wage growth should have jeopardized recently grown expectations that the BoE will reduce interest rates by 25 basis points (bps) to 4.5% in the policy meeting on February 6. However, soft labor demand would offset this. After the labor market report, analysts at Nomura commented that this data will give the BoE a “green light to cut in February”.