Pound Euro (GBP/EUR) Exchange Rate Volatile as UK Job Market Cools

May 16, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Volatile as UK Job Market Cools

Pound Euro (GBP/EUR) Exchange Rate Zig-Zags after UK Jobs Data

The Pound Euro (GBP/EUR) exchange rate wavered on Tuesday. UK employment data initially saw the pairing fall amid expectations of a pause in policy tightening from the Bank of England (BoE). Unemployment rose unexpectedly whilst wage growth slowed.

A greater-than-forecast fall in Germany’s ZEW economic sentiment index saw the exchange rate claw back its losses, however.

On the other hand, positive growth in the Eurozone economy capped any potential gains for GBP/AUD.

At time of writing the GBP/EUR exchange rate was at around €1.1507, which was virtually unchanged from that morning’s opening figures.

Pound (GBP) Fluctuates after Evidence of Cooler UK Labour Market

The Pound (GBP) tread water on Tuesday after an earlier slump. Cooler jobs data weighed on Sterling at the opening of the European session.

March’s unemployment unexpectedly rose to 3.9% which markets took as a sign of slack in the UK’s labour market.

Additionally, wage growth slowed in March as it remained unchanged at 5.8%. Last month’s hotter-than-forecast wage figures were highlighted as a key driver in the BoE’s decision to hike interest rates. Tuesday’s data prompted a pullback in interest rate hike bets.

James Smith, ING’s Developed Markets Economist, said:

‘From the BoE’s perspective, today’s report was the first big data test ahead of the June meeting, and there’s nothing here that screams a need for further hikes. Our base case is a pause next month, though by its own admission, the Bank of England is data-dependent now, and there’s still another jobs report and two CPI releases before next month’s meeting.’

The Pound managed to regain some lost ground later in the day amid fresh US Dollar (USD) selling, however.

Euro (EUR) Gains despite Fears of German Recession

The Euro (EUR) saw firmed against its peers on Tuesday. The single currency initially strengthened as EUR benefitted from a slightly weaker US Dollar. European Central Bank (ECB) rate hike bets also lifted the Euro.

However, the single currency shed some of its gains later in the day after some disappointing data. May’s reading of Germany’s economic sentiment index fell by more than expected, dropping to -10.8 from -5.3.

The third consecutive decline adding to fears of protracted slowdown and a possible recession in the trading bloc’s largest member.

Speaking on the data, ING’s Global Head of Macro Carsten Brzeski said:

‘All of this doesn’t mean that the German economy will be stuck in recession for the next couple of years. But it does mean that growth will remain subdued at best and that the flirtation with stagnation will continue.’

The single currency was maintained its upward momentum after upbeat Eurozone GDP data, though. The Eurozone’s economy grew by 0.1% in the first quarter of 2023. Above-forecast trade data also lent support to the Euro. The trading bloc’s trade surplus widened to €25.6bn versus the expected narrowing to -€12.7bn.

GBP/EUR Exchange Rate Forecast: Will Cautious Bailey Speech Dent Confidence in Sterling?

Looking ahead for Sterling, a speech from BoE Governor Andrew Bailey could dampen enthusiasm for the currency on Wednesday. Bailey’s comments after the central bank’s interest rate decision signalled a more dovish tilt, and additional cautious commentary could pull GBP lower.

BoE rate hike bets may also prompt movement in Sterling over the rest of the week. Markets are currently pricing in a more subdued 20bps of tightening from the central bank.

Finally, the prospect of continued industrial action in the UK could pile further pressure on Sterling. Additional health sector and rail sector strikes are expected in the coming months.

Speeches from ECB President Christine Lagarde on Thursday and Friday could strengthen the Euro. Investors will be looking for any signals of the central bank’s previous hawkish stance.

Friday will also bring a speech from hawkish rate-setter Isabel Schnabel who has previously advocated for additional interest rate increases. Similar rhetoric from Schnabel could bolster EUR.

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TAGS: Pound Euro Forecasts