The Pound Euro (GBP/EUR) exchange rate fluctuated as UK labour market showed considerable signs of cooling as unemployment remained steady, but wage growth eased.
At time of writing the Pound Euro (GBP/EUR) exchange rate traded around €1.1340, relatively unchanged from the morning’s opening levels.
Pound (GBP) Exchange Rates Undermined by Cooling Labour Market
The Pound (GBP) struggled to find a clear direction on Tuesday in the wake of mixed employment data.
The unemployment rate fell below forecasts and remained close to historic lows and stayed at 3.7%, for the fourth consecutive month. However, wage growth eased for the first time in over a year, tempering rate hike expectations.
The Bank of England (BoE) usually keep a close eye on wage growth in the UK as a reliable gauge on inflationary pressures on the labour market. With the first slowdown recorded since late 2021, the market could expect the central bank to pause their tightening cycle at the next meeting. Wage growth dropped to 5.7% from a revised 6% in December, leaving real-term pay 3.2% below the rate of inflation.
Underlying the data was further concerns for the UK economy. ONS also reported that employers remained cautious about the economic outlook as the number of job vacancies fell by 51,000. Tony Wilson, Director at the Institute for Employment Studies, warned of the hidden side of low unemployment. With figures showing almost half a million less workers than before the pandemic, as illness and retirement masked 1.7m people not looking for work. He added:
‘Today’s figures show the scale of the challenge for the budget tomorrow, with nearly 3 million people who want a job right now but most not getting any help to find one.’
Euro (EUR) Exchange Rates Supported by Elevated Rate Hike Bets
Meanwhile, the Euro (EUR) retained some of its strength on Tuesday, despite a lack of data. With the collapse of US-based Silicon Valley Bank (SVB) sending shockwaves through the banking sector, concerns of a knock-on effect weighed on investors’ minds.
Reassurances from several European Central Bank (ECB) policymakers allayed fears of repercussions from the Silicon Valley Bank collapse. Tuesday morning, ECB policymaker Yannis Stournaras commented that Eurozone banks would feel no impact from the US-based bank’s folding.
However, weighing on the Euro could be concerns that despite all its hawkish rhetoric, ECB could be contemplating a smaller 25bps rate hike on Thursday. With the collapse of SVB, the markets are concerned that the Federal Reserve’s aggressive tightening cycle has started to impact the financial sector. Analysts at ING have predicted that the ECB could slow down:
‘Our economics team does not see a very material risk of a 25bp hike this week and only expects recent market developments to affect the debate about the path beyond March, but should the ECB surprise with such a smaller move, it would entirely be due to financial risks as opposed to a more constructive view on inflation.’
GBP/EUR Exchange Rate Forecast: Spring Budget to Boost Sterling?
Looking ahead, the Pound Euro exchange rate could see further movement with the Spring Budget from Chancellor Jeremy Hunt. Set to outline the government’s plans for spending and taxes, GBP investors will be looking for how the government intends to spur economic growth going forwards. Hunt, in the wake of the latest jobs data, commented ahead of Wednesday’s budget:
‘The jobs market remains strong, but inflation remains too high. Tomorrow at the budget, I will set out how we will go further to bear down on inflation, reduce debt and grow the economy, including by helping more people back into work.’
Meanwhile, the Euro could see mild movement with a flurry of economic data on Wednesday. With the latest inflation rate for France, coupled with industrial production in the Eurozone, the Euro could slip on reduced rate hike bets.