Pound Euro (GBP/EUR) Exchange Rate Rallies as Markets Bet on 50bps Hike from BoE
(Updated 16:45, 11/07/23) The Pound Euro (GBP/EUR) exchange rate strengthened today after UK wage growth printed at a record high, increasing the likelihood that the Bank of England (BoE) will keep its foot firmly on the brake.
Average earnings printed at 7.3% in the three months to May, matching a previous record high and boosting bets on another 50bps rate hike from the BoE next month. This saw the Pound (GBP) surge higher.
Meanwhile, the Euro (EUR) came under pressure after German economic sentiment declined more than expected.
In response, the GBP/EUR exchange rate briefly touched a near nine-month high before trimming its gains amid some profit-taking.
At the time of writing, the Pound Euro pair is trading at around €1.1731, up almost 0.4% on the day, having earlier struck €1.1759.
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Pound Euro (GBP/EUR) Exchange Rate Roars Higher on Strong Earnings Growth
The Pound Euro (GBP/EUR) exchange rate jumped higher this morning after UK wage growth hit a record high, boosting market expectations of another 50bps rate hike from the Bank of England (BoE).
At the time of writing, the GBP/EUR exchange rate is trading at around €1.1737, up 0.4% on the day.
Pound (GBP) Soars amid 50bps BoE Bets
The Pound (GBP) leapt higher this morning after the latest UK labour market report saw markets price in more aggressive action from the BoE.
The most important element of the report was average earnings, which printed above expectations to show that wage growth was at a record high of 7.3% in May. Economists had expected it to cool slightly to 7.1%. Furthermore, the previous month’s figure was revised up from 7.2% to 7.3%.
Recently, the Bank of England has ramped up its fight on inflation amid fears of a wage-price spiral. After slowing its pace of interest rate hikes from 50bps to 25bps, the BoE voted to enact another 50bps hike at its last meeting.
Policymakers are worried that rising wage growth is keeping inflation elevated, and today’s data will fuel those fears.
As a result, market odds on another half-point hike at the BoE’s August meeting are up today. This is supporting Sterling.
However, today’s data also revealed an unexpected rise in unemployment. The jobless rate rose from 3.8% to 4% – its highest level since December 2021 – rather than holding steady.
This could be capping GBP’s gains.
Euro (EUR) Slides as German Economic Sentiment Deteriorates
Meanwhile, the Euro (EUR) is facing headwinds today after a larger-than-forecast fall in German investor morale.
The influential ZEW economic sentiment index fell to -14.7 in July, down from -8.5 the previous month and below expectations of -10.5. This is the weakest reading since last December, showing that confidence in the Eurozone’s largest economy is deteriorating faster than thought.
The concerns come as higher interest rates hamper global growth. In addition, Germany’s vital export and industrial sectors face renewed challenges amid China’s faltering economic recovery.
Russia-Ukraine tensions could be adding to EUR’s challenges today. Ukraine’s bid for NATO membership is in the spotlight at the military alliance’s summit in Vilnius, Lithuania. Talks around Ukraine’s accession are ratcheting up tensions between Russian and the West, which may be worrying EUR investors.
Pound Euro Exchange Rate Forecast: Can Sterling Hold Its Gains?
Looking ahead, Sterling’s upside could begin to moderate as the session progresses. There’s also the potential for GBP/EUR to trim its gains as some investors cash in on today’s sharp rise.
That said, risk appetite could continue to underpin the more risk-sensitive Pound. If the market mood remains fairly upbeat, Sterling may push higher against the safer single currency.
Turning to tomorrow’s session, the BoE’s Financial Stability Report could impact the Pound. If the report highlights the challenges facing the UK economy – the worsening cost-of-living crisis, fears of a ‘mortgage timebomb’, stubbornly high inflation, and the risks of a self-inflicted recession – then Sterling could stumble.
As for the Euro, tomorrow afternoon brings a speech from European Central Bank (ECB) Chief Economist Philip Lane. Any hints at future policy plans could affect EUR, with signals of further monetary tightening potentially supporting the single currency.