Gold and silver are under price pressure in the UK as the pound climbed to a 15-month high against the dollar this morning.
After sinking towards parity last year during the Truss-Kwarteng mini-budget chaos, the pound has bounced back on rising interest rates, and reached a high of $1.2933 today. This is the strongest the pound has been against the dollar in 15 months, when GBP fell below $1.30 in April 2022. While still a far cry from the $1.70 strength of GBP pre-Brexit, it represents a more than 20% rise from the $1.072 levels of September last year.
This morning’s gains were spurred by the latest UK wage data, which showed that employee pay is rising at record levels. Private sector pay increased by 7.3% year-on-year from March to May. While this level isn’t quite keeping up with inflation, it remains a non-pandemic record, and is considered by some analysts to be fuelling a wage-price spiral; forcing businesses to increase their prices to pay for their staff’s higher salaries, and in turn causing staff to seek higher wages to afford the increased expense of everyday goods.
Today’s pay figures have only increased expectations that the Bank of England will need to speed up the pace of their rate hikes, with a 0.5%-point rise at their next meeting in August. The half-point hike is now seen as the most likely option among markets, with a 70% chance. This would take rates to 5.5%, and well on the way to the expected 6% by the end of the year.
Higher interest rates will of course be unwelcome news for mortgage holders and first-time buyers. 2-year mortgage rates have been steadily climbing for weeks now and have reached a 15-year high of 6.66% this morning. If the BoE can’t bring inflation down quickly, and wages continue to climb, then further hikes are inevitable, and it’s unclear how much more pressure the housing market can take from these elevated mortgage rates.
For gold and silver, the high pound is putting pressure on metal prices here in the UK. Gold is up 2% in the past two weeks in USD, but down 0.4% in the UK due to Sterling rising. So far markets have largely priced in expectations for a peak of 6.25% for UK interest rates, but if wage growth continues to fuel higher inflation, then rates may need to climb even higher, pushing the pound past $1.30, and adding further pressure to gold and silver domestically.