Pound Euro (GBP/EUR) Exchange Rate Slumps Despite UK Wages Bettering Forecast
As the UK unemployment rate defied forecast to rise to 4.4% in the three months to December the Pound to Euro (GBP/EUR) exchange rate slumped sharply.
This unexpected rise in unemployment overshadowed better-than-expected average weekly earnings data, with investors reluctant to bet on the prospect of an imminent Bank of England (BoE) interest rate hike.
While wage growth accelerated to 2.5% on the year this is still lagging some way behind domestic inflationary pressure, indicating that the long-running squeeze on household finances is set to continue for some time to come.
Even though BoE Governor Mark Carney reaffirmed the Bank’s position that interest rates are likely to rise three times over the next three years this was not enough to offer the Pound (GBP) a rallying point.
Weaker Eurozone PMIs Limit Euro (EUR) Exchange Rate Strength
Although the latest raft of Eurozone manufacturing and services PMIs fell slightly short of forecast this failed to benefit the GBP/EUR exchange rate.
While growth across the Eurozone economy showed some loss of momentum in February it still remains at an elevated level, with both the overall manufacturing and services PMIs staying firmly within expansion territory.
This offered the Euro (EUR) some cause for confidence, even as markets braced for the release of the Federal Open Market Committee (FOMC) meeting minutes.
However, with the European Central Bank (ECB) looking set to leave monetary policy on hold for some time to come EUR exchange rates are likely to remain under a degree of downside pressure.
If January’s ECB meeting minutes prove more cautious in tone this could thus offer the GBP/EUR exchange rate a rallying point tomorrow.
Latest UK GDP Estimate Forecast to Dent GBP/EUR Exchange Rate
Further volatility is forecast for the GBP/EUR exchange rate tomorrow, however, with the release of the second estimate of fourth quarter UK gross domestic product.
Even with no change expected from the headline figure the confirmation that growth eased to 1.5% at the end of 2017 could still weigh on the Pound.
The details of the report are also likely to influence the mood of investors, with more of the data being filled in from the first estimate.
Any signs of weakness within the UK economy may encourage fresh selling of GBP exchange rates, giving the BoE greater incentive to delay an interest rate hike.
Either way, the outlook for the Pound remains rather fragile, as Jane Foley, FX Strategist at Rabobank, noted:
‘The UK money market is not fully priced for a rate hike in May but, since the hawkish February Inflation Report from the BoE, the market foresees a substantial risk for a move from the Bank this spring. For months the MPC has been assuming that tight labour market conditions will provide a push higher in inflation. This factor, in addition to its assumption that Brexit will be smooth, could be severely tested in the coming months.’
Anything that undermines the prospect of an imminent rate hike is likely to see the GBP/EUR exchange rate lose further ground.