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Pound Euro Exchange Rate News: GBP/EUR Pressured as UK Wage Growth Slows

January 18, 2022 - Written by John Cameron

GBP/EUR Muted as UK Wage Growth Slows

The Pound Euro (GBP/EUR) exchange rate is trading in a narrow range at the beginning of today’s session in response to UK wages falling behind inflation.

At the time of writing, the GBP/EUR exchange rate is trading at approximately €1.1947, down slightly on the day’s opening levels

Pound (GBP) Struggles on Mixed UK Jobs Data

The Pound (GBP) is trading flat against the Euro (EUR) this morning as UK jobs data is released.

Average earnings, including bonuses, for November met forecasts, printing at the predicted 4.2%. The figures show a slowdown in wage growth from the previous 4.9% reading.

This is the smallest expansion in a year, with private sector wages increasing by 4.5%, whilst the public sector’s wages increased by 2.6%.

A slowdown in UK wages has the potential to weaken the economic recovery following the pandemic due to lower consumer spending.

As wages aren’t becoming entrenched with current inflation, the Bank of England (BoE) may raise rates more slowly in the coming year.

Wages have consistently been slowing since June 2021 when it reached a record high of 8.8%.

Despite this, wages are still above pre-pandemic levels, largely due to base and compositional influences.

On the other hand, the UK’s unemployment rate for November has decreased from 4.2% to 4.1%, and December’s claimant count change has reduced from -95.1K to -43.3K.

This shows that more people are now in employment which will boost the UK economy and support GBP.

Frances O’Grady, the general secretary of the TUC, said:

‘While it’s good to see employment continuing to rise, on pay it’s the same story of a squeeze on workers.

‘Working people deserve a decent standard of living and a wage they can raise a family on. But instead, following the worse pay squeeze for two centuries, real pay is falling, and they now face a cost-of-living crisis.’

Euro (EUR) Edges Higher on Upbeat Economic Sentiment Index

The Euro (EUR) has received support at the beginning of today’s session from positive German and Eurozone data.

The Eurozone’s ZEW Economic Sentiment Index for January published higher than the previous 26.8, beat market forecasts of 29.5, and printed at 49.4.

This is the highest level since July 2021 as the majority of surveyed analysts are confident that the coming year will present strong economic activity.

In addition, Germany’s ZEW Economic Sentiment Index also exceeded forecasts 32 by coming in at 51.7.

This is an improvement of 22.6 points as investors are optimistic that Europe’s largest economy, Germany, will boost EUR’s potential throughout 2022.

ZEW president, Achim Wambach, said:

‘The economic outlook has improved considerably with the start of the new year. The majority of financial market experts assume that economic growth will pick up in the coming six months.’

However, the Euro’s gains have been capped by the stronger US Dollar due to the negative correlation between the pairing.

GBP/EUR Exchange Rate Forecast: Will UK Inflation Rate Aid GBP?

Looking ahead, the Pound Euro exchange rate is likely to be influenced by a range of data scheduled for release during Wednesday’s session.

December’s inflation rate will likely drive movement in GBP, as it is forecast to reach 5.2%, slightly higher than the previous 5.1%.

This may support Sterling as higher inflation rates is likely to cause the Bank of England (BoE) to hike interest rates at the policy meeting in February.

Sterling may also be impacted by a BoE’s Governor, Andrew Bailey, on Wednesday as he provides insight into BoE’s future policy.

On the other hand, Germany’s inflation rate for December’s final reading is likely to confirm the forecast increase from 5.2% to 5.3% which may impact the single currency.

Furthermore, both GBP and EUR are likely to remain vulnerable to the ongoing coronavirus situation and the return of Brexit negotiations.

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