Pound Euro (GBP/EUR) exchange rate rebounds on strong UK employment data
The Pound Euro (GBP/EUR) exchange rate is strengthening this morning, hitting its highest level since August 2022 amid slower-than-expected UK wage deflation.
At the time of writing the GBP/EUR exchange rate is trading at around €1.1753, up approximately 0.3% from this morning’s opening rate.
Pound (GBP) rallies on upbeat employment data
The Pound (GBP) is firming this morning as the latest UK jobs data came in stronger than forecast.
Unemployment rose less than expected in December to 3.9%, rather than reaching expectations of 4%.
Similarly, average UK earnings (including bonuses) for the months of October through to December slowed less than anticipated to 5.8%, rather than 5.6%
With UK earnings slowing less than predicted in the fourth quarter of 2023, the Bank of England’s (BoE) cautious stance will likely persist in the coming months, following its suggestion that wage growth must cool before steps are taken to loosen monetary policy.
Jake Finney, an economist at PwC UK, observes that stubborn wage growth and rising unemployment pose a dilemma for policymakers:
‘The lingering concern for the Bank of England will be that the labour market has not cooled sufficiently to achieve a sustainable return to the 2% inflation target. This remains one of the key barriers to the base rate cut in May that markets are currently expecting.’
Euro (EUR) boosted by economic optimism
The Euro (EUR) is mixed this morning, following a seventh consecutive rise in Germany’s ZEW economic sentiment index.
Economic optimism was up in February to 19.9, reaching its highest level in a year and surpassing forecasts of 17.5, according to the highly impactful ZEW indicator.
However, improving conditions in the Euro bloc’s largest economy leads investors and economists alike to speculate on looming European Central Bank (ECB) interest rate cuts.
Amid economic rebounding in the Eurozone, renewed expectations that ECB policy could begin to loosen in the coming months could prevent the common currency from garnering significant support this morning.
ZEW President Achim Wambach said:
‘Economic expectations for Germany have improved again. Accordingly, more than two-thirds of the respondents expect the ECB to make interest rate cuts over the next six months in light of falling inflation rates.’
Pound Euro exchange rate forecast: UK inflation to sink rate cut bets?
Looking ahead, the UK’s latest inflation data is due for release tomorrow. Economists expect headline inflation to rise to 4.2% as well as core inflation edging higher to 5.2%. Amid an increasingly hawkish narrative from BoE policymakers, signs of warming inflation in January’s year-on-year report will likely provide further grounds for rate-setters to pushback against interest rate cuts in the first half of the year.
Also due out tomorrow is the second estimate for Eurozone GDP which could drive significant EUR volatility. In the fourth quarter, growth is due to flatline at 0%. This could pressure the common currency amid ongoing signs of economic stagnation. However, a slight increase by 0.1% in the fourth quarter’s year-on-year GDP report may cushion EUR’s downside.
In the meantime, the Pound Euro exchange rate may fluctuate amid any market volatility. The increasingly risk-sensitive Pound may find support in a cheery spell of trade. However any gloomy trade could see the safe-haven Euro take precedent.