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Pound to Euro Exchange Rate Forecast: Sterling Losses ahead on UK Wage Squeeze?

Pound Sterling Currency Forecast

The Pound has dropped against the Euro on Wednesday’s afternoon session, owing to a sudden turnaround in trader sentiment. While the Pound hit a daily high of 1.1682 on earlier unemployment rate news, it has since dropped to 1.1612 due to a stronger focus on poor UK earnings.

The fact that UK real incomes are supposedly at their worst since the Napoleonic era has come into this change of opinion, as has the possibility that UK retail sales could fall far below forecasts.

(First published 10:03, May 17th, 2017)

The Pound has made minor gains against the Euro today, but remains highly vulnerable to the potential repercussions of a UK wage squeeze.

Fears that consumer purchasing power could suffer have been triggered by recent UK inflation and wage growth figures. Annual inflation in April has risen to 2.7%, but basic average earnings in March have posted 2.1%.

This puts UK incomes firmly at risk of shrinking, as even without falling wages, higher prices mean less ‘real income’.

According to Resolution Foundation Research and Policy Analyst Stephen Clarke;

‘Pay growth turned negative at the start of the year and looks set to remain below inflation throughout most of 2017. Coming so soon after the big post-crisis pay squeeze, this new phase of falling pay means that this decade is set to be the worst in over 200 years for pay packets’.

Lower incomes have a negative knock-on effect for the UK economy, particularly in the retail sector. If UK consumers have less to spend on non-essential items, retail activity could drop off and put pressure on national retailers.

If the UK does seem to be entering a spending freeze due to poor wage conditions, the Pound could progressively slide against the Euro.

Future Euro demand could be determined by the outcome of June’s French parliamentary elections.

France’s new President, Emmanuel Macron, has made a rolling start, appointing a Prime Minister and meeting with German Chancellor Angela Merkel.

It is Macron’s longer-term performance that matters, however, as June’s election could significantly boost or inhibit his ability to enact key policy changes.

Macron’s first real test is to secure a majority of supportive MPs in the June election, either through direct wins for his party or via the allied Democratic Movement party.

By appointing Republican Edouard Phillipe as Prime Minister, Macron is clearly trying to win over the political right to his centrist cause. Macron is expected to make similar conciliations for the political left, which represents a gamble for the young leader.

If the President is able to secure mass support for his cause, the Euro could rally. If Macron fails to gain a majority, however, then the Euro could slump over fears that he will struggles to implement changes.

Recent Interbank GBP EUR Exchange Rates

At the time of writing, the Pound to Euro (GBP EUR) exchange rate was trading up at 1.1670 and the Euro to Pound (EUR GBP) exchange rate was trading down at 0.8567.