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Euro Pound (EUR GBP) Exchange Rate Dips on Upbeat UK Wage Growth

December 13, 2017 - Written by John Cameron

The Euro Pound (EUR GBP) exchange rate tumbled slightly on Wednesday as markets reacted to upbeat wage growth figures in the UK and some disappointing inflation readings in Germany.

EUR GBP Exchange Rate Slides as Markets React to UK Wage Growth

According to data released on Wednesday from the Office for National Statistics (ONS), average weekly wages in the UK jumped by 2.3% in the three months to October – narrowing the gap slightly between wages and soaring levels of inflation.

The data revealed that UK workers’ total earnings, excluding bonuses, increased by 2.3% per week over the latest period, beating the previous 2.2% increase and the market forecast that this reading would remain steady.

Average earnings, including bonuses, similarly climbed, this time from the previous period’s upwardly revised 2.3%, to 2.5% - beating the forecast of a 2.2% rise.

Whilst this news is positive, concerns remain that the gap between wages and inflation will remain high, particularly with inflation jumping in November to a high of 3.1%.

Nonetheless, many economists and indeed the Bank of England (BoE) predict that inflation will fall back into 2018, perhaps giving wage growth a small enough gap to clear.

Ben Brettell, Senior Economist at Hargreaves Lansdown reflected this assessment, stating:

‘The pay squeeze continues for now, but with wages growing a little more strongly and inflation set to fall back in the new year, this looks like it’ll come to an end in the next few months’.

In slightly more contentious news, the UK’s unemployment rate remained steady at a 42-year low of 4.3% over the three months to October, unchanged from the May to July period but missing the market forecast of 4.2%.

Exploring the figures, however; the number of people in work actually declined for the second month in a row - dropping to 32 million - whilst the number of people claiming unemployment benefits jumped to 817,500 in November, massively surpassing the expectation of a claimant rise of 3,200.

This could potentially point to a slow-down in the UK’s recent jobs boom, with more people being classed as ‘economically inactive’ and businesses liable to continue holding off on massive employment investment measures until a greater degree of clarity is available regarding the future of the UK after Brexit.

EUR Exchange Rates Limited Despite Positive Eurozone Data

The Euro traded fairly weakly against the majors today, despite some positive ecostats from the bloc and news that German Chancellor Angela Merkel and her Christian Democratic Union (CDU) has entered into grand coalition talks with the Social Democrats (SPD).

Industrial production in the Euro Area jumped by 3.7% year-on-year in October, beating the market expectation of a 3.5% climb and following the previous period’s upwardly revised 3.4% gain.

The primary contributor to this rise was the output of intermediate and non-durable goods, which increased at a faster pace - with industrial production notably accelerating in Spain, Italy and France.

In other positive news, Germany’s consumer prices rose by 1.8% year-on-year in November, beating the previous 1.6% rise and matching economist estimates.

Germany is the Eurozone’s largest economy, so whilst this was widely expected to occur, it still bodes well for the bloc’s inflation prospects in the medium-term.

This news nonetheless failed to push things back into the Euro’s favour.

EUR GBP Exchange Rate Forecast: Merkel Coalition Talks Begin

Chancellor Angela Merkel is due to meet SPD leader Martin Schulz this evening for the first set of unmediated talks regarding the possibility of a ‘grand coalition’ government.

This news follows the worst electoral performance in post-war German history for the SPD, who then insisted that they were abandoning their coalition with Merkel’s CDU in favour of going their own way.

In a surprising flip-flop, however, the SPD eventually agreed to resume coalition talks with Merkel after the ‘Jamaica coalition’ talks continually failed (leaving Germany without functioning government since the election).

Economists and political commentators, however, do not expect a deal to be prompt, with Schulz himself having asserted that talks at this stage are ‘open’ – making them liable to fail.

Any progress made could drive some demand back into the Euro, though evidence of further deadlock could leave the EUR GBP exchange rate continually floundering.

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