Recent Pound Sterling Exchange Rate Trends Attract Market Attention. At a time when the pace of the global economic recovery has slowed, the UK labour market’s payroll growth figures have introduced new variables that have further pushed the Pound into a more volatile position. As of February 19, 2025, the exchange rate of the pound against the US dollar was around 1 pound to 1.26 dollars, slightly higher than the previous week; the pound against the euro remained near 1 pound to 1.17 euros. Wage growth has raised concerns about the persistence of inflation, which may affect the Bank of England’s monetary policy decisions. Despite the economic slowdown, the Bank of England recently lowered interest rates to 4.5%, but the room for further rate cuts may be limited as rising wages could fuel inflation.
The recent changes in the pound’s exchange rate are closely related to wage growth data in the UK. According to the latest report released by the UK Office for National Statistics, as of December 2024, the UK’s average annual wage growth rate reached 5.9%, far exceeding market expectations. This data has reignited market concerns about a rebound in UK inflation and further influenced market forecasts regarding the Bank of England’s monetary policy.
Wage growth implies higher household income and stronger consumption capacity, which often drives price increases. However, although the current level of inflation in the UK has retreated from its peak in 2023, it remains above the Bank of England’s 2% target. Continuous wage increases may make it difficult for inflationary pressures to subside quickly. Therefore, the market expects that the Bank of England will not rush to cut interest rates in the short term, and some even believe that if inflation rebounds, the period of maintaining high interest rates may be further extended.
There is a close link between the Bank of England’s monetary policy and the pound’s exchange rate. If the Bank chooses to delay rate cuts or releases further hawkish signals, this often supports the pound’s exchange rate; conversely, if the market believes a rate cut is imminent, the pound may come under depreciation pressure. Wage growth data is an important factor influencing the Bank’s decisions, which explains the root cause of the recent increased volatility in the pound’s exchange rate.
As an important indicator of economic fundamentals, wage growth mainly affects the pound’s exchange rate in the following aspects.
First, rising wages mean increased household income and higher consumer demand. In the long term, this will help promote economic growth, thereby supporting the pound’s exchange rate. However, in the short term, wage growth may intensify inflationary pressures, forcing the Bank of England to maintain a tight monetary policy, which would boost the pound.
Second, wage growth raises labor costs for businesses. If companies pass these costs on to consumers, price levels will rise more significantly. This will also force the Bank to delay rate cuts or even maintain high interest rates for an extended period. High interest rates typically attract international capital inflows into the UK market, thereby pushing up the pound’s exchange rate.
The following table shows the changes in the UK’s wage growth rate and the pound’s exchange rate since the second half of 2024:
| Time | UK Average Annual Wage Growth Rate | Pound to US Dollar Exchange Rate |
| July 2024 | 5.1% | 1.30 |
| September 2024 | 5.6% | 1.27 |
| December 2024 | 5.9% | 1.26 |
It can be seen that although the rise in wage growth has supported the pound’s exchange rate to some extent, concerns about the UK’s economic outlook and global economic uncertainty continue to put pressure on the pound.
The fluctuations in the pound’s exchange rate have a particularly significant impact on businesses, especially those involved in international trade. When the pound appreciates, the cost of imports to the UK decreases, benefiting companies that rely on imported raw materials. However, the price of UK export products becomes higher in overseas markets, which may weaken competitiveness. Conversely, when the pound depreciates, exporters benefit, but the rising import costs increase production cost pressures.
Recently, due to the temporary strengthening of the pound driven by wage growth, many export companies have already felt the challenges brought by exchange rate fluctuations. For example, the UK Manufacturers’ Association stated that some manufacturing companies have seen a decline in order volumes due to the stronger pound. In addition, fluctuations in energy prices and rising supply chain costs have placed dual pressures on business operations.
For investors, changes in the pound’s exchange rate directly affect areas such as foreign exchange trading and UK asset allocation. For instance, when the pound strengthens, investors holding pound-denominated assets gain from exchange rate appreciation; however, when the pound weakens, they must be cautious about the risk of asset value depreciation. Furthermore, uncertainty in interest rate policy will also require investors to adjust their investment strategies in both the bond and stock markets.
In the face of frequent fluctuations in the pound’s exchange rate, investors need to adopt corresponding strategies to reduce potential risks.
Investors may consider allocating hedging assets in a timely manner, such as purchasing gold or US dollars, which have value-preserving functions, to diversify the risks caused by the depreciation of pound-denominated assets. At the same time, they can flexibly use foreign exchange instruments, such as forward contracts and forex options, to hedge against the adverse impact that exchange rate fluctuations may have on their investment portfolios.
In addition, for investors who are optimistic about the UK’s economic fundamentals in the long term, they may take advantage of the pound’s weakness to buy high-quality UK stocks or bonds at lower prices, aiming to achieve capital appreciation when the pound rebounds.
The recent fluctuations in the pound’s exchange rate are closely related to wage growth in the UK, and this change has brought varying degrees of impact on both businesses and investors. Against the backdrop of global economic uncertainty, closely monitoring the pound’s exchange rate trends and adopting flexible response strategies are particularly important, whether for business operations or asset allocation.
*The content of this article is for sharing and reference purposes only and does not constitute professional investment advice. Due to differences in individual circumstances and needs, you may contact the Cashback Island team or consult your financial planner for professional advice.
As of now, the most commonly used electronic payment methods in the UK include:
Digital wallets (Apple Pay, Google Pay, PayPal), bank cards (Visa, Mastercard, Barclays, HSBC), buy-now-pay-later services (Klarna, Clearpay), and online platforms (PayPal, Stripe). Contactless payment has a high adoption rate, and mainstream brand technologies comply with EU and UK financial security standards.
The pound has a higher value. As of February 19, 2025, the pound to euro exchange rate remained around 1 pound to 1.17 euros.
