Pound Euro (GBP/EUR) Exchange Rate Bounces but Remains Weak
(Updated 15:30, 19/7/22) The Pound Euro (GBP/EUR) exchange rate bounced off a 12-day low this afternoon, although it remains firmly on the back foot.
The earlier downside came as markets begin pricing in the possibility of a half-percentage-point rate hike at the European Central Bank’s (ECB) next meeting.
Meanwhile, mixed UK jobs data failed to keep the Pound (GBP) afloat. Although the country’s labour market remains strong, real pay is plummeting as wage growth lags behind inflation.
Not only does this fuel cost-of-living concerns, but it could mean that the Bank of England (BoE) doesn’t raise interest rates as high as markets currently expect. One thing prompting the BoE to hike rates is the fear of second-round inflation effects: if wages rise with inflation, it could lead to a wage-price spiral, further exacerbating inflationary pressures. However, with wage growth still far behind inflation, these concerns are looking less likely to materialise. As a result, the BoE may be able to ease off the brakes sooner than expected.
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Pound Euro (GBP/EUR) Exchange Rate Falls on ECB Rumours
The Pound Euro (GBP/EUR) exchange rate fell sharply this morning, hitting a 12-day low, amid reports that the European Central Bank (ECB) may be considering a 50-bp rate rise at its meeting on Thursday. Meanwhile, a mixed UK jobs report is offering limited support to Pound Sterling (GBP).
At the time of writing, the Pound Euro pair is trading at €1.1741, down 0.3% from this morning’s opening levels.
Euro (EUR) Surges amid ECB Rate Rise Speculation
The Euro (EUR) jumped higher today as EUR investors reacted to rumours that the ECB will hike rates by more than expected.
The bank has signalled that it will raise rates for the first time in a decade on Thursday. Markets were expecting a move of 25 basis points, with a steeper hike likely to follow in September.
However, according to Reuters, two sources close to the matter have said that the ECB will discuss whether to raise rates by 25 or 50 bps at the upcoming interest rate decision.
Monetary policy in the Eurozone has lagged behind other major central banks, many of which have been enacting larger, consecutive rate hikes for the last few months. EUR investors seem hopeful that the ECB will seek to close the gap by lifting off with a half-percentage-point hike.
The sources also said that policymakers were closing in on a deal to help indebted countries, such as Italy and Greece, which could be adversely affected by higher borrowing costs.
This news has caused some excitement among EUR investors, causing a sharp rise in the Euro.
Pound (GBP) Bolstered by Mixed Jobs Data
Meanwhile, the Pound is rising against some of its other peers following mixed employment data, and this may be limiting its losses against the Euro.
Supporting Sterling, the UK’s unemployment rate beat forecasts. It held at 3.8% rather than rising to 3.9%, as economists expected.
From March to May, the number of people in work increased by 296,000, smashing forecasts of a 170,000 increase.
Finally, the economic inactivity rate fell as more people entered the workforce.
These robust results were a relief after a surprise rise in the unemployment rate last month. While the UK economy faces multiple headwinds, the country’s labour market seems strong, offering a ray of hope.
The positive results could also increase the likelihood of a steeper rate rise from the Bank of England (BoE) at its next meeting in early August.
However, the latest data on pay was worrying. Wage growth continues to lag behind inflation, with real pay (excluding bonuses) falling 2.8% in the three months to May – a record drop.
After taking inflation into account, average pay including bonuses fell by 0.9% in the year to March to May 2022.
Excluding bonuses, it fell by 2.8% – the biggest fall since records began in 2001 https://t.co/jdOBu3PNFB pic.twitter.com/yp7erKE7li
— Office for National Statistics (ONS) (@ONS) July 19, 2022
Concerns over the UK’s intensifying cost-of-living crisis may be capping support for Sterling and could be contributing to GBP/EUR’s losses.
Pound Euro Exchange Rate Forecast: BoE’s Bailey to Support Sterling?
As the session unfolds, the Pound Euro exchange rate may be able to claw back some losses. As the ECB report simply states that the bank might consider a larger rate rise, the sharp jump in EUR could lack follow through, allowing GBP to recoup some losses.
GBP investors will be looking ahead to a speech from BoE Governor Andrew Bailey later this afternoon. Following the strong jobs data and hawkish comments from the BoE’s Michael Saunders yesterday, traders may be hopeful that Bailey will strike a similarly hawkish tone. If he does, Sterling could rise, but if he disappoints then GBP/EUR could fall further.