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Higher UK Wage Growth Triggers Pound to Euro Exchange Rate Rise

December 13, 2017 - Written by Ben Hughes

The GBP/EUR pairing opened in the region of 1.1329 during the morning, later closing higher at 1.1343 by the end of the day.

This advance came despite trader uncertainty about UK inflation, which reached 3.1% in November.

This unexpected rise from 3% put inflation at an almost-6 year high and brought up difficult questions for Bank of England (BoE) Governor Mark Carney.

With inflation over 1.1% higher than the BoE’s target range, Carney will be forced to explain the situation to Chancellor Philip Hammond, in addition to suggesting ways to combat excessively high prices.

Pound to Euro Rate Rises as UK Earnings Grow above Forecasts

The Pound has advanced against the Euro today, seeing a 0.3% increase in the pairing.

This is largely down to UK earnings figures, which have shown slightly above-forecast growth in October.

Earnings without bonuses saw a rise from 2.2% to 2.3%, while in a more expected outcome, earnings with bonuses grew from a 2.3% reading to 2.5%.

Other UK jobs data has shown no change in the unemployment rate at 4.3%, but jobless claims have dropped from 6.5k cases in November to 5.9k.

Today’s underlying optimism is focused mainly on the earnings stats, which show that wage growth is (slowly) creeping up towards the pace of inflation.

Problematically, however, real earnings are still declining, as the overhanging wage squeeze conditions remain firmly in place.

Taking a dim view of the government’s celebrating the figures, Shadow Work and Pensions Secretary Debbie Abrahams has said;

‘Today’s figures are further evidence of Tory economic failure, only a day after inflation rose to its highest level in over five-and-a-half years.

Both employment and real wages are falling, while the price of household essentials balloons, leaving millions of people worse off than they were in 2010.

Eight million people in working households live in poverty, and many will struggle this Christmas as a direct result of this Government’s austerity policies’.

Delving further into the real income drop, Joseph Rowntree Foundation Chief Economist Ashwin Kumar has said;

‘Wages are yet again rising more slowly than prices. Combined with frozen benefits, 2017 has been a year of stress for family finances.

But people working in retail and hospitality, who already face low wages, are being hit particularly hard.

In real terms, earnings have fallen by 1.4% since last year in these sectors, compared to a 0.4% fall for the average worker’.

Other concerns have been raised by rising employment stats, even though these were not enough to change the overall unemployment rate.

Ian Brinkley, CIPD Acting Chief Economist, has warned that;

‘These figures suggest the UK’s employment engine has begun to splutter.

The fall in the total number of people in work, down 0.2%, is primarily driven by a fall in full-time self-employment.

Coupled with a fall in unemployment, this appears to point towards constraints in the overall supply of labour rather than a decline in demand.

There is a strong possibility that the continued expansion of the labour market has hit its ceiling.

In response, employers would be wise to invest more in their existing workforce, especially in light of recent declines in the number of apprenticeships’.

Euro Exchange Rate Slips as German Coalition Talks remain Tentative

The Euro has lost ground to the Pound today; this has largely been down to uncertainty about the next stage of German coalition talks.

Angela Merkel’s CDU/CSU party notably failed to conclude coalition talks in recent weeks, when potential partners the FDP party left discussions.

Since then, Merkel has been considering a grand coalition with the second-largest party, the SPD. SPD officials have approved talks with Merkel’s union; if successful this will be a repeat of the previous administration.

While German inflation and Eurozone industrial production has risen today, the Euro has failed to be consistently supported by the news.

Pound to Euro Turbulence ahead over EU Summit Conclusion

The EU Summit that starts on Thursday could have a significant impact on the GBP/EUR exchange rate, both on Thursday and Friday when it concludes.

EU leaders will be meeting to discuss the UK’s progress in Brexit talks, ideally resulting in approval for post-Brexit trade talks in 2018.

If the leaders don’t think that the UK has done enough and block trade discussions, however, the Pound could drop sharply against the Euro.

Despite this potential for a Pound drop, Sterling might still be able to rise if the Euro is damaged by PMI readings.

Both Eurozone and German PMI activity measures are predicted to worsen on Thursday morning, which could devalue the Euro.
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