Pound (GBP) Remained Soft as Weak Wage Growth Set to Put Pressure on UK Consumers
A stronger-than-expected uptick in UK inflation saw the Euro to Pound (EUR GBP) exchange rate weaken, with investors taking heart from the decreased prospect of the Bank of England (BoE) easing policy further. However, when paired with the persistent slow pace of domestic wage growth revealed in Wednesday’s raft of labour market data this rise in inflationary pressure is less encouraging. With the Consumer Price Index expected to overshoot the BoE’s 2% inflation target over the coming months it seems likely that there will be a renewed pay squeeze, which could negatively impact on the UK economy as consumers spend less.
As James Knightley, senior economist at ING, noted:
‘We remain worried about the outlook for 2017 given hiring intention surveys have deteriorated. Employment growth is likely to slow and we suspect that the Brexit related uncertainty will make firms reluctant to offer significant pay rises. At the same time, Sterling weakness will continue to push up price inflation, meaning household spending power is sharply eroded.’
Even so, the Euro (EUR) struggled to make any particular headwind against the Pound (GBP). This was largely due to the increased risk appetite of investors, who were emboldened by a third quarter Chinese GDP report. Confidence in the outlook of the Eurozone itself was dented by disappointing construction output figures, which showed that the momentum of the sector had slowed on the year from 3.1% to 0.9%.
EUR GBP Exchange Rate Forecast: Less Dovish ECB Meeting Could Shore up Euro Demand
Greater volatility is expected for the single currency in response to the European Central Bank’s (ECB) October policy meeting. While policymakers are not seen making any changes at this juncture the tone of discussion will be of particular interest to investors. After President Mario Draghi indicated a less dovish outlook at the last meeting there has been speculation that the ECB could be considering tapering its quantitative easing program, a prospect that is bullish for the Euro.
However, if policymaker sentiment is seen to remain biased towards loose monetary policy then the EUR GBP exchange rate is expected to slump sharply.
The appeal of the Pound, meanwhile, is likely to be impacted by September’s UK public sector net borrowing data. While the amount of new borrowing is forecast to have dipped on the month this could nevertheless prompt a resurgence in worries over the wideness of the domestic deficit. With the future of the UK economy still decidedly unclear and Sterling still biased to the downside markets are unlikely to greet any increase in borrowing positively.
Current Interbank Exchange Rates
At the time of writing, the Euro to Pound (EUR GBP) exchange rate was trending narrowly at 0.89, while the Pound to Euro (GBP EUR) pairing was on an uptrend around 1.12.
Comments are closed.