Pound Euro Exchange Rate News: GBP/EUR Fluctuated amid Stronger-than-Expected UK Wage Growth

June 13, 2023 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Fluctuated amid Stronger-than-Expected UK Wage Growth

Pound (GBP) Boosted by Persistently Tight Labour Market

The Pound (GBP) found modest success against most of its rivals on Tuesday in the wake of strong labour market data. Against expectations of an uptick in unemployment, and modest wage growth, the data surprised to the upside and pointed to a hotter-than-expected labour market.

With predictions of a 6.9% climb in the three months leading up to April, wage growth surged by 7.2%. Pointing to the fastest growth on record, outside pandemic levels, potentially allowing the Bank of England (BoE) to continue its tightening cycle. Hussain Mehdi, Macro and Investment Strategist at HSBC Asset Management, said of the latest data:

‘For the Bank of England, wage growth is a big problem – it is simply at too high a level to allow inflation to hit the 2% target.’

Meanwhile, the jobless rate also surprised the market and edged lower, rather than higher, as unemployment dropped to 3.8% from 3.9%. Employment also increased dramatically, as 250k roles were added in the same time frame and far above the predicted 162k increase.

GBP investors were buoyed at the prospect of further tightening from the BoE amid a persistently tight labour market. As inflation remains stubbornly high, and still amongst the highest in the G7, the central bank will be eager to reach the target rate of 2%. James Smith, ING economist, said of the situation:

‘For the Bank of England, all of this cements a June rate hike and if the inflation numbers continue to come in hot, it’s quite plausible that we end up with an August move as well. Much will depend on how CPI inflation comes out over the next couple of months.’

Euro (EUR) Supported by Rate Hike Bets

Meanwhile, the Euro (EUR) managed to hold firm against the Pound despite economic sentiment remaining in negative territory. A better-than-expected fall in German business sentiment failed to deter investors as the European Central Bank (ECB) is set to raise the interest rate on Thursday.

Predictions of a further slump in business confidence were met with better-than-expected readings. The German ZEW economic sentiment index registered a slight improvement as it ticked up to -8.5 against expectations of falling to -13.1. However, with the index still in negative territory, companies are still concerned over the economic uncertainty surrounding Europe’s largest economy, Germany.

Keeping the Euro afloat are elevated interest rate hike bets from the ECB. With the interest rate decision coming Thursday, hawkish ECB policymakers maintain their stance that inflation remains too high.

GBP/EUR Exchange Rate Forecast: GDP Growth to Bolster the Pound?

Looking ahead, the Pound Euro exchange rate could see daylight between the pairing if UK GDP growth prints to forecast. With expectations of the UK economy returning to growth after falling in March, a 0.2% increase could provide much-needed support for Sterling.

Meanwhile, the Euro could pare those gains if industrial production also reveals a welcome growth in the stuttering sector. A 0.8% improvement could provide further evidence for the ECB to continue raising the interest rates.

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TAGS: Pound Euro Forecasts