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Deepening Squeeze on UK Real Pay Boosts Euro Pound Exchange Rate

Disappointing German inflation and business sentiment results left the Euro on a weaker footing against its rivals, undermining confidence in the strength of the Eurozone’s powerhouse economy.

With the European Central Bank (ECB) already taking a dovish view on inflationary pressure within the currency union this added to bets that the central bank will leave monetary policy unchanged for the foreseeable future.

Even so, as Eurozone industrial production picked up on the month in April the appeal of the Euro improved somewhat on Wednesday morning.

Jitters are likely to increase ahead of tomorrow’s Eurogroup meeting, with time running out for finance ministers to approve the disbursement of the next tranche of Greek bailout funds.

As Greece faces a major repayment deadline in July there are fears that a fresh Eurozone crisis could be on the horizon if the meeting fails to yield an agreement between creditors.

However, if the funds are approved in a timely manner this would kick the can down the road once again and give the Euro fresh cause for confidence.

Weak UK Wage Growth Weighs on Pound Ahead of BoE Meeting

As the sense of political uncertainty that followed the UK general election seemed to ease at the start of the week the Pound was able to regain some ground.

While the Conservatives and Democratic Unionist Party (DUP) have not yet finalised a confidence and supply arrangement Theresa May looks set to remain Prime Minister for the time being.

This helped to limit the impact of an unexpected uptick in the latest consumer price index, which rose from 2.7% to 2.9% on the year in May.

Worries over the squeeze on consumer spending worsened as growth in average weekly earnings dipped to 2.1% in the three months to April, falling further behind the rise in inflationary pressure.

As the Office for National Statistics noted:

‘Between February to April 2016 and February to April 2017 in real terms (that is, adjusted for consumer price inflation) total pay for employees in Great Britain fell by 0.4%, the lowest growth rate since July to September 2014.’

Even so, the Bank of England (BoE) looks set to maintain its neutral policy outlook on Thursday.

If policymakers seem to step further back from a return to a tightening bias the mood towards the Pound could sour, with interest rates likely to remain at their historic lows for some time to come.

While the BoE has pledged to look through some degree of post-referendum inflation, however, the CPI has already outstripped the Bank’s own forecasts.

Should the Monetary Policy Committee (MPC) indicate that it is reaching the limits of its tolerance for above-target inflation then the EUR GBP exchange rate could come under increased pressure.

Current EUR GBP Interbank Exchange Rates

At the time of writing, the Euro Pound exchange rate was making modest gains at 0.8799. Meanwhile, the Pound Euro exchange rate was on a narrow downtrend in the region of 1.1363.