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GBP EUR Recovers from 2017 Lows as ECB Minutes Warn of Euro Strength

  • GBP EUR Exchange Rate Near 1.10 Again – Recovers from multi-year lows
  • UK Job Market Results Impress – Pound becomes more appealing
  • Update: UK Retail Sales Mixed – But Euro weaker after ECB minutes
  • Forecast: Eurozone PMIs Next Week – And consumer confidence surveys

Updated 12:56 BST 17/08/2017:

The Pound made another recovery attempt against the Euro on Thursday, as investors sold the Euro in reaction to the latest European Central Bank (ECB) meeting minutes.

ECB policymakers indicated concern about the recent strength of the Euro.

As the Eurozone’s economy relies heavily on exports, a stronger Euro could make those exports pricier and dent demand.

Amid reports that the ECB is unlikely to offer any new forward guidance at Jackson Hole next week, the Euro has become less appealing and GBP EUR has recovered slightly.

[Published 06:00 BST 17/08/2017]

While the GBP EUR exchange rate hit its worst levels this year in response to Britain’s latest inflation report, June’s UK job market results were enough to make Sterling more appealing to investors again and the Pound Euro exchange rate has recovered.

After opening this week at the level of 1.1002, GBP EUR touched on a seven-year-low of 1.0941 on Wednesday morning. Following the publication of Britain’s job report, the pair recovered nearer to the level of 1.10 again.

Pound (GBP) Supported by UK Wage Growth Stats

Investors were finally given a reason to buy the undervalued Pound yesterday, as Britain’s latest June labour market results beat expectations in most major prints.

The nation’s key unemployment rate unexpectedly improved from 4.5% to 4.4%, the lowest level for the rate since 1975. A better-than-expected 125k new jobs were made in the three months into June.

As well as solid employment results, June’s UK wage growth figures beat expectations.

Average earnings excluding bonuses were forecast to remain at 2% but rose to 2.1%, while wages including bonus jumped from a revised 1.9% to 2.1%, comfortably above the forecast 1.8%.

July’s UK jobless claims results were solid too. Analysts forecast jobless claims would rise by 3.7k, but they instead dropped by -4.2k. The claimant count rate remained at 2.3%.

However, Sterling’s gains were limited as analysts don’t believe the solid job results notably improved Britain’s mixed economic outlook. According to Professor Geraint Johnes, director of research at Work Foundation;

‘Overall, the evidence suggests that, despite the low headline rate of unemployment, there remains a lot of slack in the labour market.

With employment continuing to rise while rates of immigration fall, this slack is likely to diminish over the coming months. But, with pay settlements now well below the rate of price inflation, there is no evidence to suggest that this is turning into sustained wage pressure.’

Concerns remain that UK real wages are falling as wage growth fails to keep up with inflation, despite UK inflation disappointing this week and leaving investors doubting the Bank of England (BoE) will take a more hawkish stance in the foreseeable future.

This, as well as solid Eurozone data, has limited GBP EUR recovery this week.

Euro (EUR) Limits Pound Recovery as Eurozone Growth Improves

While Germany’s growth report earlier this week was mixed, Wednesday’s Italian and overall Eurozone growth projections beat forecasts and bolstered the Euro’s support.

Italy’s Q2 Gross Domestic Product (GDP) projection was forecast to improve from 1.2% to 1.4% year-on-year, but improved to 1.5%.

As a result of better yearly growth projections, the Eurozone’s second Q2 growth projection was revised from 2.1% to 2.2%.

Analysts were pleased with the Eurozone growth projection, which indicated the currency bloc’s economy was becoming increasingly strong in most notable areas. According to economist Bert Colijn from ING Bank;

‘No breakdown by components has been released as of yet, but some of the individual countries show the economy is firing on all cylinders right now. Domestic demand is improving significantly, while exports continue to grow despite uncertainty among trade partners and an appreciating Euro. While some countries remain laggards in the Eurozone, the good news at the moment is that poorer performers are also exceeding expectations.’

The day’s other Eurozone data was solid too. Growth and trade balance data from The Netherlands beat expectations.

While this week’s Eurozone stats haven’t notably altered the Euro outlook, they have limited the Pound to Euro recovery.

GBP EUR Exchange Rate Forecast: UK Retail Sales Stats in Focus

Britain’s pay squeeze remains a concern to analysts, as inflation outpaces wage growth causing real wages to fall.

As real wages fall, consumers have less spending power. In Britain’s consumer-facing economy, lower consumer spending can have a negative effect on the economy.

As a result, investors will be looking to Thursday’s UK retail sales report from July to see how the pay squeeze is affecting activity.

If retail sales slowed more than expected in July, it will worsen concerns that Britain’s economic growth is being affected by the pay squeeze.

On the other hand, stronger than expected retail data would indicate consumers are resilient and continue to spend, boosting the economic outlook and making Sterling more appealing.

Thursday will see the publication of the Eurozone’s final July inflation report too, which could influence Euro trade if it surprises.

Eurozone inflation is forecast to have contracted -0.5% month-on-month, so if inflation beats expectations it will make investors more confident that the European Central Bank (ECB) could take a hawkish tone on monetary policy in the foreseeable future.