Pound to Euro Exchange Rate: Best in Five Months to Continue?

February 14, 2024 - Written by John Cameron

STORY LINK Pound to Euro Exchange Rate: Best in Five Months to Continue?

The Pound Euro (GBP/EUR) exchange rate posted gains after stronger-than-expected UK labour-market data with lower unemployment and evidence of sticky wages growth.

Although the labour market has cooled, the Bank of England will be concerned that wages growth is still too high to allow an interest rate cut.

The Pound to Euro (GBP/EUR) exchange rate jumped to touch 1.1750 before settling at 1.1740 from 1.1715 as markets continued to price out the potential for a near-term Bank of England (BoE) interest rate cut.

The Office for National Statistics (ONS) reported that the UK unemployment rate declined significantly to 3.8% from 4.2% and below consensus forecasts of 4.0%.

The ONS also estimated that the number of people on payrolls increased 48,000 for January and December data was revised to show an increase of 31,000 compared with decline of 24,000 in the flash data.

The economic inactivity rate was little changed at 21.9% with long-term sickness rates at historic highs.

In the three months to January 2024, UK vacancies declined 26,000 to 932,000, the 19th successive decline.

ONS director of economic statistics Liz McKeown commented; “It is clear that growth in employment has slowed over the past year. Over the same period the proportion of people neither working nor looking for work has risen, with historically high numbers of people saying they are long-term sick.”

She added; “Job vacancies fell again, for the nineteenth consecutive month. However, there are signs this trend may now be slowing.”

The annual increase in headline average earnings slowed to 5.8% in the three months to December, but this was above expectations of 5.6% and the November increase was revised to 6.7% from 6.4%.

Underlying earnings growth slowed to 6.2% from a revised 6.7% previously, also slightly above market expectations of 6.0%.

There will be important reservations over the data given revisions and changes to methodology.

The BoE remains very sensitive to wages data given the implications for underlying inflation pressures in the economy.

Evidence of a tight labour market will maintain an important element of caution surrounding inflation trends and tend to reinforce a reluctance to cut interest rates given concerns that inflation will settle above the 2% target level.

In comments on Monday, BoE Governor Bailey played down the impact of any technical recession for the second half of 2024. According to Bailey; “If we do get two successive negative quarters it will be very shallow. What I would put more weight on is that the indicators we have seen since have shown some signs of upturn.”

MUFG commented; “Bailey saw signs of “an upturn” in the forward-looking data and coupled with the slow pace of decline in the wage data today will encourage continued caution by the BoE and that should help provide GBP with further support.”

Hugh Gimber, global market strategist at JP Morgan Asset Management, noted the importance of inflation in the services sector.

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TAGS: Pound Euro Forecasts