Disappointing UK wage growth data helped the Euro Pound exchange rate to recover some of its lost ground, somewhat muting the impact of August’s stronger-than-expected UK inflation rate.
Altogether this signalled that the squeeze on UK household finances is likely to continue for some time to come, with inflation looking set to outpace wage growth for the foreseeable future.
Even so, the mood towards the Pound could pick up once again on Thursday if the Bank of England (BoE) lives up to market expectations and shifts towards a more hawkish outlook.
If Chief Economist Andy Haldane finally breaks ranks to vote for an immediate interest rate hike this could prompt Sterling to trend sharply higher across the board.
While any imminent policy action is distinctly unlikely any indication that the balance of the Monetary Policy Committee (MPC) is starting to lean in the favour of the hawks would weigh heavily on the EUR GBP exchange rate.
As analysts at ING noted:
‘The combination of more robust UK inflation signals in the latest round of CPI and labour market data releases – as well as a hawkish tilt at the September BoE meeting – could mark a positive turning point in GBP sentiment.
‘We are now starting to see the risk premium related overshoot in EUR/GBP unwind; a hawkish hold at this week’s BoE meeting could fuel a further correction towards – and potentially below – the 0.90 level, which would almost certainly shelve any EUR/GBP ‘parity’ fears for now.’
However, if policymakers maintain a largely dovish outlook on monetary policy this could reverse the Pound’s earlier gains and drive the pairing away from its recent lows.
Euro Vulnerable to Weakening German Sentiment
The mood towards the Euro, meanwhile, could pick up if the ZEW economic sentiment index for September points towards a more resilient Germany economy.
If signs indicate greater strength within the Eurozone’s powerhouse economy this may offer the single currency a fresh rallying point.
On the other hand, any weakening of economic sentiment could give the European Central Bank (ECB) further cause for caution and knock the EUR GBP exchange rate back.
Fresh commentary from members of the ECB Executive Board could also provoke volatility for the Euro, particularly if they continue to adopt a more dovish viewpoint.
Any doubts over the odds of the central bank beginning to taper its quantitative easing program in the near future are likely to significantly dent the appeal of the single currency.
However, if policymakers express greater confidence in the Eurozone economy and fail to mention the relative strength of the Euro then the EUR GBP exchange rate could benefit.