Falling Investor Sentiment Weakens Euro to Pound (EUR/GBP) Exchange Rate despite Muted Reaction to UK Wage Data
A worse-than-expected decline in German investor sentiment has today prevented the Euro to Pound (EUR/GBP) exchange rate from capitalising on the lacklustre Sterling response to the latest UK wage data.
The overall ZEW economic sentiment indictor for Germany fell from 5.1 during March to -8.2 for April, significantly outpacing the drop to -1 expected, while the economic sentiment index weakened from 90.7 to 87.9.
The economic sentiment reading is the lowest score recorded since 2012, when the Eurozone was in the grip of a debt crisis.
The overall economic sentiment index for the Eurozone declined from 13.4 to 1.9 instead of to 7.3 as predicted.
This negative outlook comes at a time when a moderating of strength in recent economic releases has seen many question whether the Eurozone economy is beginning to run out of steam after recovering from the debt crisis.
However, the downside impact of this upon the Euro to Pound (EUR/GBP) exchange rate has been muted by a cool response from markets to the latest UK wage growth data.
Pound Sterling Weakens from 11-month High; EUR/GBP Exchange Rate Holds Opening Levels despite UK Wage Growth Acceleration
Markets and economists appear to be disagreeing over how positive today’s UK wage growth figures are, with the former selling the Pound (GBP) while the latter claims a rate hike may be on the way; the EUR/GBP exchange rate has been able to hold opening levels as a result.
Excluding bonuses, wage growth accelerated from 2.6% to 2.8% in the three months to February when compared to the same period a year ago, but overall weekly earnings held steady at 2.8% instead of rising as forecast to 3%.
The ILO unemployment rate unexpectedly fell from 4.3% to 4.2%, which could signal a further uptick in pay growth.
Berenberg Bank Economist Kallum Pickering stated;
‘Accelerating wage growth, low and stabilising unemployment – the UK seems to be approaching full employment.’
‘Employment gains are slowing despite record high labour demand. Instead, wage growth is edging up nicely as the degree of mismatch between the skills of the remaining workers and the skills demanded by firms increases.’
However, markets may be concerned that the drop in unemployment wasn’t sufficient to boost overall wages already, which could signal a disconnect between employment levels and pay growth.
Also preventing the GBP/EUR exchange rate from making gains today is the fact that the pairing has recently hit an 11-month high, so its upside potential is limited.
Focus on UK Inflation Figures Forecast to Undermine Euro to Pound Sterling (EUR/GBP) Exchange Rate if Core Price Growth Meets Expectations
Speeches from US Federal Reserve officials later this afternoon and this evening could create overnight volatility for the Euro to Pound Sterling (EUR/GBP) exchange rate, as changes to the US monetary policy outlook could create momentum for USD and push EUR in the opposite direction.
The Eurozone data set for release tomorrow may not have much of an impact, given that it is mostly finalised consumer price index figures for March; only an unexpected change on the previous estimates is likely to cause much turbulence.
Low-impact Eurozone construction output figures are the only other ecostats due for release tomorrow, which means that Pound Sterling could be left in charge of the GBP/EUR exchange rate, given the importance of the day’s UK economic data.
UK inflation data is predicted to show a small slowdown in month-on-month price growth from 0.4% to 0.3%, but an uptick in year-on-year core price growth from 2.4% to 2.5%, while overall price growth is expected to hold steady at 2.7%.
A rise in core price growth could provide further incentive for the Bank of England (BoE) to hike interest rates next month as is widely expected by the markets.
This would undermine the Euro to Pound Sterling (EUR/GBP) exchange rate, with markets buying Sterling on the hopes of higher borrowing costs in May.
