The GBP EUR exchange rate was higher on the week after the UK economy showed employment was back at pre-virus levels. Inflation was also higher than expected with the highest monthly increase since records began in 1997. The big event this week is the Bank of England rate meeting on Thursday and the stakes are now raised with the latest data.
The GBP to EUR was trading above the 1.1700 level but is vulnerable below the 1.1800 level after another failure to hold support above that level recently.
Jobs and inflation pressure dovish interest rate expectations
The last week was highlighted by the UK economy’s jobs report and inflation. The unemployment rate in the UK dropped again to 4.6% after the economy added 183k jobs into July, which was better than the 178k expected.
It was also reported that jobs were at pre-virus levels and vacancies were at a record level. That will help to cushion the fall from the furlough scheme on September 30th. Over the next two weeks we may even see the furlough extended by the Treasury if they get cold feet ahead of the autumn season, where virus case levels may rise.
The latest headline economic data led to Goldman Sachs bringing their rate hike expectations forward by a year. The bank’s chief economist for the UK said:
“Our analysis suggests that underlying wage growth is strong and inflation pressures are firming more than anticipated”.
“MPC member commentary, combined with the new Chief Economist appointment, suggests that a majority of the committee now view the minimum conditions for starting monetary policy tightening have been met,” they said.
That is more in line with the view of BoE policymaker Michael Sunders, who said a rate rise may be warranted before the end of next year. His comments came ahead of the latest jobs and inflation data.
Inflation hogs the headlines for the GBP vs the EUR
The eurozone economy also released inflation on Friday with analysts expecting a jump to 1.6%. That is below the European Central Bank’s 2% inflation target, but forward rate swaps in the bond market are trading around 2% for the 10-yr. In the UK the situation is more urgent with a jump to 3.2% and that will pressure consumers further after the recent National Insurance tax hike.
Sarah Coles at Hargreaves Lansdown said: “Inflation has taken a breath-taking leap, surging at its fastest rate in over 20 years. It was given a significant shove by the Eat Out to Help Out scheme discounts a year earlier, which will drop out of the figures next month. However, much of this enormous jump is powered by the same alarming imbalance between supply and demand that has seen yawning gaps open up on the supermarket shelves. It spells trouble for shoppers, savers and the broader economy.”
Yaela Selfin, chief economist at KPMG, said: “Higher inflation will inevitably raise questions for the Bank of England on the timing of tightening monetary policy and interest rate hikes to contain inflationary risks further down the line. Recruitment difficulties, cost pressures for businesses, supply chain issues and structural changes post-Covid are all pointing to higher inflation until at least the end of this year.”