Pound Euro (GBP/EUR) Exchange Rate Bolstered by UK Jobs Data

January 17, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Bolstered by UK Jobs Data

Pound Euro (GBP/EUR) Exchange Rate Climbs after UK Jobs Data

The Pound Euro (GBP/EUR) exchange rate rose on Tuesday. The pairing was bolstered by evidence of persistent UK wage growth which bolstered Bank of England (BoE) interest rate hike bets.

The GBP/EUR exchange rate saw its gains capped by a risk-off market mood however, as well as hawkish comments from European Central Bank (ECB) policymakers.

At time of writing the GBP/EUR exchange rate was at around €1.1317, which was up roughly 0.4% from that morning’s opening figures.

Pound (GBP) Climbs as Wage Growth Data Bolsters BoE Rate Hike Bets

The Pound (GBP) was bolstered on Tuesday by the release of November’s robust jobs data. Sterling’s gains were limited by a cautious market mood, however.

GBP was pushed higher by above-forecast wage growth figures on Tuesday. Pay excluding bonuses rose by 6.4%, its biggest increase since records began in 2001. The evidence of continued inflationary pressures prompted bets on more aggressive action from the BoE, and bolstered Sterling.

James Smith, Developed Markets Economist at ING, said:

‘For the time being though, the jobs market is the biggest argument in favour of another 50 basis-point rate hike by the Bank of England. Indeed, wage growth came in a touch higher than expected in the latest figures, and the bank's own survey data continues to point to more acute pay pressures.’

Additionally, unemployment remained low at 3.7% in November which markets took as an indicator of a tight labour market.

Euro (EUR) Slips Against GBP amid Downbeat Outlook for German Economy

The Euro saw mixed movements on Tuesday. EUR edged higher against its riskier peers amid a pullback in global risk appetite. On the other hand, the single currency came under pressure from downbeat signs from the German economy.

The final reading of December’s inflation for Germany, the trading bloc’s largest member, weighed on the Euro on Tuesday. Inflation eased to 9.6% which prompted a pullback in ECB rate hike bets.

Warnings that the German economy will likely contract in 2023 added to EUR’s downturn. Germany’s BDI industry association stated that the country’s economy is expected to contract by 0.3% due to higher energy prices.

Hawkish comments from ECB chief economist Philip Lane lent some support to the Euro, however.

In an interview with the Financial Times, Lane said:

‘We need to raise rates more. Last year we could say that it’s clear that we need to bring rates up to more normal levels, and now we say, well, actually we need to bring them into restrictive territory.’

GBP/EUR Exchange Rate Forecast: Will UK Inflation Slowdown Weigh on GBP?

Looking to the week ahead for the Pound, a forecast drop in inflation on Wednesday could pull GBP lower if the figures print as forecast. December’s inflation is expected to slip to 10.5%. The figures could see markets pare back BoE rate hike bets and prompt losses in Sterling.

On Friday, a predicted recovery in December’s retail sales could stem any losses for the Pound. Following upbeat profit reports from major retailers over the festive season, sales are forecast to climb after November’s slump.

Domestic headlines may also weigh on the Pound this week. Further strike action may add to the UK’s gloomy outlook.

For the Euro, the final reading of December’s Eurozone inflation figures could prompt a pullback in ECB rate hike bets. The data is expected to confirm a drop to 9.2% inflation which could also pull EUR lower.

On the other hand, speeches from multiple ECB policymakers could push the Euro higher if they signal further rate hikes. Speeches from ECB President Christine Lagarde on Thursday and Friday will be of particular interest to investors.

Also on Friday, German PPI figures could weigh on the Euro if they print as forecast. December’s figures are expected to slow which could also prompt a further pullback in ECB rate hike bets.

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