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GBP EUR Daily Update: Sterling Exceeds 1-Month Pairing High on Inflation Figures

September 12, 2017 - Written by Toni Johnson

Yesterday, the Pound gradually appreciated against the Euro from an opening exchange rate of 1.0977 to a close in the region of 1.1013.

Rising UK Inflation Pushes Up GBP/EUR Exchange Rate

As mentioned above, a significant rise in UK inflation has led to the Pound climbing against the Euro. The advance has been notable, consisting of an annual increase from 2.6% to 2.9% in August.

Traders have been mixed on interpreting the news – some think that UK inflation has further to go, while Ben Brettel of Hargreaves Lansdown sees 2.9% as a peak. After the inflation data came out, Brettel said;

‘Inflation ticked up again in August, with increased petrol and diesel prices contributing to a year-on-year figure of 2.9%, up from 2.6% in July and matching May’s four-year high.

This will inevitably raise questions about the UK’s ongoing cost of living squeeze. Data released tomorrow is expected to show pay increasing at 2.2% in the three months to July, meaning wages are still shrinking in real terms.

Yet it looks likely that inflation will fall back in the coming months, as the effect of Brexit-induced Sterling weakness falls out of the year-on-year calculation’.

Speaking of the ‘cost of living squeeze’, this is the second time the UK has faced these conditions within a decade. Looking at the negative impacts of these conditions has been Andrew Sentence.

A former Bank of England (BoE) policymaker and now senior economist at PriceWaterhouseCoopers, Sentence said;

‘With very well-developed and complex supply chains, it can take a number of years for a decline in the exchange rate, which raises import prices, to feed through fully to consumers.

This suggests that the recent squeeze on consumer spending from higher inflation will continue to dampen growth in the UK economy in the second half of this year and next year. There is not much sign yet that consumers will get any early relief from the surge in inflation following the Brexit vote last summer’.

Offering a rather boilerplate response to the news, the Treasury issued the following statement;

‘We know some families have concerns with their day to day cost of living.

That’s why we are boosting take home pay with tax cuts for over 30 million people and a National Living Wage that is giving the lowest earners their fastest pay rise for 20 years’.

As well as the basic level of inflation rising, core inflation (that discounts volatile factors like fuel sales) also ticked up to 2.7%. This has put immense pressure on the Bank of England (BoE) to act, although whether they will actually do so remains unclear.

EUR GBP Rate Slides as French President Macron Faces Protests

In addition to posting heavy losses against the Pound today, the Euro has also given a mixed overall performance against peers.

A shortage of high-impact data has left French political news in focus, where President Emmanuel Macron has faced open protests against his leadership.

Elected earlier this year, the French President has had a rocky start to his tenure, seeing his popularity slump due to objections on policy.

Today’s protest has been because of Macron’s plans to reform France’s labour laws, a highly controversial issue.

Among the difficult-to-swallow plans are a cap on payouts for unfair dismissals, as well as granting greater freedoms to employers to hire and fire employees.

Macron is not expected to be flustered by these protests, but on a wider level it is far from the ideal start to his presidency.

GBP EUR Outlook: Pound Crash Possible on Earnings Figures

While the Pound has enjoyed considerable gains against the Euro today, these could evaporate on Wednesday morning when UK earnings figures come out. Although earnings are tipped to rise in July, inflation is still forecast to outstrip the rate of wage growth.

Such conditions would perpetuate the current UK wage squeeze, which has negative implications for national consumer spending.

Early Eurozone news on Wednesday will cover German inflation reported in August. The main annual figure is expected to show growth, which may push the Euro up against a struggling Pound.
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