Pound Euro (GBP/EUR) Exchange Rate Strengthens amid BoE Expectations
(Updated 15:30, 16/8/22) The Pound Euro (GBP/EUR) exchange rate wavered higher today, eventually hitting an eight-day high, as markets price in another 50-bp rate rise from the Bank of England (BoE).
Although the bank warned earlier in the month of a coming UK recession, it also said it would ‘act forcefully’ if needed to bring down inflation. A recent poll of 51 economists found that 30 of the respondents believe another half-point hike is likely next month.
The latest employment data this morning has further raised expectations of more hawkish action. Despite worries that inflation outpaces wage growth, the labour market looks fairly strong and average earnings are rising faster than anticipated. This, paired with a smaller-than-forecast contraction in the UK economy in June, has made markets think that a 50-bp hike may be increasingly likely.
Today, UK government bond yields – often an indicator of rate hike expectations – are climbing. At the time of writing, the UK 10-year gilt is up 0.12% on the day and is at its highest level in over three weeks.
Meanwhile, the Euro (EUR) took a hit earlier after Germany’s ZEW economic sentiment index unexpectedly dropped to a near 14-year low. The grim outlook comes as Europe’s largest economy continues to wrestle with soaring inflation, supply-side shocks and potential gas shortages.
A turnaround in market mood and subsequent decline in the US Dollar (USD) may have limited the Euro’s losses. EUR shares a strong negative correlation with USD, so the pullback in USD could be benefitting the single currency.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Firms as Mixed Jobs Data Boosts BoE Rate Rise Bets
The Pound Euro (GBP/EUR) exchange rate strengthened this morning as a mixed UK employment report gave the Pound (GBP) a modest lift against a weakening Euro (EUR).
At the time of writing, GBP/EUR is trading around €1.1871, up from this morning’s opening levels of €1.1859.
Pound (GBP) Ticks Higher amid Mixed Jobs Data
Pound Sterling rose against the single currency this morning following the UK’s latest labour market overview. While the report painted a mixed picture, it was positive enough to help GBP rise against a weaker EUR.
The UK unemployment rate held at a near 47-year low of 3.8% while benefits claimants fell and employment rose, suggesting that the labour market remains robust.
Headline indicators for the UK labour market for April to June 2022 show that
▪️ employment was 75.5%
▪️ unemployment was 3.8%
▪️ economic inactivity was 21.4%
— Office for National Statistics (ONS) (@ONS) August 16, 2022
Meanwhile, average earnings exceeded expectations. Although real income fell at a record pace as pay lags behind inflation, the above-forecast rise in wage growth has lifted expectations that the Bank of England (BoE) will hike interest rates by another half point next month.
Commenting on today’s data, Ruth Gregory, Senior UK Economist at Capital Economics, said:
‘Despite economic growth contracting in the second quarter, with workers having been hard to find, we suspect firms will be cautious about shedding workers in the coming quarters for fear of not being able to re-hire them when demand recovers.
‘With wage growth running well above the rates of 3.0-3.5% that are consistent with the 2% inflation target, it supports our view that the Bank of England will raise interest rates from 1.75% now to 3.00%, despite the economy being in recession.’
Increased BoE rate rise bets may be offering the Pound some support. However, the fall in real pay and worries about a UK recession could keep a lid on GBP’s gains.
Euro (EUR) Subdued amid Economic Concerns
Meanwhile, the Euro was on the defensive this morning as worries about the Eurozone economy maintain a bearish tone around the single currency.
The monetary union faces many challenges, including surging prices, gas shortages and political tensions. Most recently, the drought hitting much of Europe has seen water levels fall drastically in the Rhine river – a vital shipping route for Germany.
Germany – the Eurozone’s industrial powerhouse – has been hit particularly hard by both the Covid pandemic and the Russia-Ukraine war. If the Rhine dries up further it could result in another supply shock for the increasingly fragile German economy.
Pound Euro Exchange Rate Forecast: ZEW Index to Further Hurt EUR?
Looking ahead, Germany’s latest ZEW economic sentiment index could create further headwinds for EUR. Economists expect the indicator to remain at a ten-year low.
As for the Pound, we could see more movement as markets digest the nuances of the employment report. The Pound Euro pair’s upside could find a limit ahead of the UK inflation rate data tomorrow.