Euro Pound (EUR/GBP) Exchange Rate Wavers amid Strengthening BoE Rate Hike Bets
The Euro Pound (EUR/GBP) exchange rate is fluctuating after the latest UK labour market data showed a shock wage growth jump and falling unemployment.
At time of writing, the EUR/GBP exchange rate is around £0.8597, relatively unchanged from this morning’s opening levels.
Pound (GBP) Buoyed by Further Tightening Expectations
The Pound (GBP) is enjoying moderate success against many of its peers this morning in the wake of stronger-than-expected employment data.
Wage growth soared further than expected as it rose 7.2% YoY in the three months leading to April. This represents the fastest growth on record outside the Covid pandemic and above market predictions of a 6.9% jump. The Office for National Statistics (ONS) also revealed that the jobless rate slipped to 3.8%. As opposed to expectations of climbing to 4%.
Employment rose further than expected as well, as 250k jobs were added in the three months to April, far above forecasts of a 162,000 increase.
With stronger-than-expected wage growth and falling unemployment, the tight labour market could allow the Bank of England (BoE) to continue its aggressive tightening cycle. With the UK currently enduring one of the highest inflation rates amongst major economies, the prospect of further rate hikes could be buoying GBP investors.
The central bank clearly wants to avoid a wage spiral and embedded inflation, and raising borrowing costs through the summer could be reality. Hussain Mehdi, Macro and Investment Strategist at HSBC Asset Management, commented on the situation
‘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.’
Euro (EUR) Supported by ECB Rate Hike Bets
Meanwhile, the Euro (EUR) remains fairly supported despite the relative strength of the Pound. A better-than-expected drop in the ZEW German economic sentiment is unlikely to deter either the European Central Bank (ECB) or investors ahead of the interest rate decision on Thursday.
Against expectations of another drop in economic sentiment, the latest indicator improved modestly to -8.5. However, the index remains in negative territory, as financial markets remain cautious over the economic growth in the Eurozone.
Keeping the Euro supported, however, are elevated rate hike expectations from the ECB. With the interest rate decision looming, EUR investors are expecting another 25bps rate hike.
Euro Pound Exchange Rate Forecast: Expanding UK Economy to Boost the Pound?
Looking ahead, the Euro Pound exchange rate could see further movement with the latest economic growth data. Expectations of the UK economy returning to growth could boost Sterling. GDP is predicted to expand 0.2%, bouncing back from a 0.3% decline in March.
Meanwhile, the Euro could also see a welcome boost with a return to growth in Eurozone industrial production. An improvement of 0.8% could buoy EUR investors ahead of the interest rate decision on Thursday.