The Pound Rose Sharply, and Here's Why

[Ben Graham]

Yesterday the British pound posted a fairly large gain against the US dollar. The main reason for buying the pound was news that the UK would raise the minimum wage for workers aged 21 and over by as much as 4.1%. This is being done to help low-income earners.

Chancellor of the Exchequer Rachel Reeves announced plans to raise the minimum wage to £12.71 per hour one day before the budget she has long anticipated. Reeves said that this decision, which will take effect in April next year, will help people who are barely making ends meet. Thus, the increase in the minimum wage next year will once again outpace inflation.

The increase in the minimum wage would certainly be a relief for millions of low-paid workers across the country. Many families experiencing financial difficulties will be able to breathe a little easier, knowing that their incomes will rise. However, it is important to remember that this is only one element of a broader economic picture. The business response to Reeves's announcement is likely to be mixed. Small businesses, especially in sectors with a high proportion of low-paid workers, may feel additional pressure on their financial resources. Larger corporations, on the other hand, are generally better prepared for such changes and may even see in them an opportunity to boost productivity by improving employee morale.

It is also important to consider potential consequences for inflation. Although the minimum wage increase is intended to help people cope with rising prices, it could also lead to further inflation if companies pass higher costs on to consumers — which they certainly will. This, in turn, could offset the benefits of the wage increase for some workers.

It is worth noting that the measure to raise the minimum wage was one of several included in the budget to address issues related to the cost of living. The Chancellor has already frozen rail fares and is expected to announce additional household cost-cutting measures on Wednesday, including reductions in electricity bills, as part of a budget package aimed at restoring the ruling Labour Party's relationship with voters and calming the markets.

The increase in the national living wage for workers aged 21 and over now amounts to £900 per year. Workers aged 18 to 20 will receive an even bigger raise in April — £1,500 per year — as their minimum wage will rise by 8.5% to £10.85 per hour.

According to Reeves, the wage increase, which follows the recommendations of the Low Pay Commission, will ensure "fair reward for the hard work of those on low incomes." It is worth noting that the UK has one of the highest minimum wage levels in Europe.

As for consumer price inflation, it slowed to 3.6% last month, which is far from the Bank of England's target level of 2%. The Bank forecasts a further decline to 2.9% by the second quarter of next year.

But considering Reeves's new measures, the situation could change quickly. As I noted above, the pound has already reacted by rising against the dollar, since such measures can affect the Bank of England's interest rate policy.

Regarding the current technical picture for GBP/USD, pound buyers need to take the nearest resistance at 1.3211. Only this will allow them to aim for 1.3244, above which a breakout will be quite difficult. The farthest target will be the 1.3275 level. If the pair falls, the bears will try to regain control of 1.3180. If they manage to do so, a breakout of this range will deal a serious blow to the bulls and push GBP/USD to the 1.3155 low with a prospect of reaching 1.3125.

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