GBP/EUR exchange rate trends lower ahead of key data
The Pound Euro (GBP/EUR) exchange rate is easing lower today amid a lack of key data from both the UK and the Eurozone. Pound (GBP) investors consider the impact tomorrow’s jobs report may have on the Bank of England’s (BoE) forward guidance, while Euro (EUR) traders eye US Dollar (USD) performance for knock-on effects.
At the time of writing, GBP/EUR is trading at €1.1741, marginally below this time yesterday.
Pound (GBP) loses ground, investors on tenterhooks
The Pound trades in a narrow range against its peers this morning, as investors hold off placing hawkish bets ahead of this week’s key data.
Tomorrow’s employment report is eagerly awaited: the British economy is expected to have added 32K jobs in January, while average earnings look to have increased and unemployment is expected to have remained unchanged.
The Bank of England has expressed that wage growth remains a barrier to progress in tackling inflation, as elevated labour costs feed into higher prices. If average earnings indeed increased by 6.2% on an annualised basis in the November-to-January period, raised inflation expectations could lead to expectations for prolonged higher interest rates.
The BoE is already considered the most hawkish between itself and the Federal Reserve regarding interest rates; the Fed is widely expected to enact a cut before the Bank of England. Tomorrow’s data could affirm the BoE’s hawkish stance, inspiring mixed Sterling sentiment.
Generally, hawkish central bank rhetoric is GBP-positive; yet concerns that higher interest rates could hamper economic growth counter Pound tailwinds. While fellow policymakers push back against bets for earlier interest rate cuts, dovish Monetary Policy Committee (MPC) member Swati Dhingra warns that monetary policy ought to be forward-looking:
‘-because moderation of the policy stance requires time to implement and to feed through to the real economy.’
Euro (EUR) supported by risk-on mood
The Euro is inching higher against its peers today, bolstered by a risk-on mood and uncertainty ahead of tomorrow’s US inflation data. Weakness in US Dollar exchange rates often inspires EUR tailwinds given the two currencies’ strong negative correlation.
Over the weekend, EUR/GBP slunk to an 18-month low; however, analysts at ING bank believe the exchange rate will continue to recover from its slump. FX strategist Francesco Pesole writes:
‘Back in February, EUR/GBP’s exploration of the 0.8500 area was very short-lived and followed by a sharp rebound. Unless UK data surprises on the strong side, we doubt EUR/GBP can fall much further from these levels.’
Yet while the single currency enjoys an uptrend currently, the outlook ahead is mixed. Although comments this morning from European Central Bank (ECB) governing council member Peter Kazimir indicate a preference for maintaining policy tightening measures, his words contrast with those of his fellow policymakers.
Kazimir said: ‘Rushing the move is not smart nor beneficial… Upside risks to inflation are alive and kicking. [We] need more hard evidence on inflation outlook, only in June will we reach the confidence threshold on that.’
Contrarily, Banque de France President François Villeroy de Galhau and Bundesbank President Dr. Joachim Nagel suggested last week that a rate cut in spring could be on the cards.
GBP/EUR exchange rate forecast: UK, US data in focus
The GBP/EUR exchange rate is likely to trade tomorrow according to the UK’s latest employment report and US inflation data.
If average earnings rose by less than expected according to January’s release, forecasts of persistent UK inflation may dwindle, consequently dialling back forecasts for a protracted interest rate hold. The prospect of earlier-than-anticipated interest rate cuts from the BoE may dampen GBP sentiment, although the country’s economic outlook could benefit.
Meanwhile, mixed US inflation data is likely to inspire a volley of speculation surrounding the Federal Reserve’s monetary policy outlook. If core inflationary pressures eased in the year to February, as expected, predictions of dovish rhetoric may ensure; on the other hand, if headline inflation held as is also forecast, rate cut bets may be minimised.
Elsewhere, risk sentiment may influence the Pound Euro exchange rate, with a risk-off mood likely favouring the single currency, while political scuffles in the UK could dampen Sterling optimism. Ahead of an expected election this year, tempers are fraying as the country’s leading political parties vie for public support.