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Surprise Uptick in UK Earnings Dents Euro to Pound (EUR/GBP) Exchange Rate

Euro Currency Forecast

Euro to Pound (EUR/GBP) Exchange Rate Slips as UK Earnings Better Forecast

An unexpected uptick in UK weekly earnings in the three months to November prompted the Euro to Pound (EUR/GBP) exchange rate to slump sharply.

Investors were surprised by this sign that wage growth is starting to accelerate somewhat, even though the 2.4% increase remains far behind the current inflation rate of 3.0%.

This encouraged the Pound (GBP) to make significant gains across the board on Wednesday morning, with Sterling making particular headway against the softened US Dollar (USD).

While this positive showing is not enough on its own to reverse the long-running wage squeeze this still boosted the odds of the Bank of England (BoE) raising interest rates again in the near term.

An accompanying rise in UK employment added to the bullish mood of GBP exchange rates, with the continued tightening of the domestic labour market giving investors cause for confidence.

Euro (EUR) Exchange Rates Dented Despite Solid Eurozone PMIs

However, the downside potential of the EUR/GBP exchange rate was still somewhat limited by continued signs of strength from the Eurozone economy.

While January’s raft of Eurozone manufacturing and services PMIs remained in strong growth territory across the board there was some loss of momentum within the manufacturing sector.

This left the Euro (EUR) under some degree of pressure, especially as markets began to brace for Thursday’s European Central Bank (ECB) policy decision.

Even so, as Bert Colijn, Senior Economist at ING, noted:

‘We believe 2018 could again be a year in which Eurozone growth beats expectations, but still inflation is not picking up as wage growth remains weak. In fact, the recent appreciation of the Euro will exert more downward pressure on the inflation rate later in 2018, which means we expect cautious communication from the ECB tomorrow. The surge in price pressures indicated by the PMI will be important to note though, as this was not just due to the higher oil prices but also thanks to improved pricing power. Even though the ECB remains concerned with reaching its inflation target in the years ahead, the mounting price pressures could cause an upside surprise to inflation estimates.’

ECB Dovishness Forecast to Weigh on EUR/GBP Exchange Rate

If the ECB proves relatively dovish in tone this could see the EUR/GBP exchange rate lose further ground, with comments from ECB President Mario Draghi set to provoke particular volatility.

With no change in policy expected at this juncture any attempt to talk down the prospect of an imminent return to monetary tightening is likely to leave the Euro lacking in support.

However, signs that an increasing number of policymakers are taking a more hawkish view could offer the EUR/GBP exchange rate a solid rallying point ahead of the weekend.

Persistent US Dollar weakness is also likely to benefit EUR exchange rates, with concerns over the trade policies of the Trump administration looking set to persist for some time to come.