GBP EUR Exchange Rate: Week in Review September 18th

GBP EUR Lower After Retail Sales Disappoint

The GBP to EUR exchange was higher again this week after the UK showed a strong employment report early in the week. That was followed by inflation that topped analysts’ expectations. Goldman Sachs were the first investment bank to bring forward their Bank of England rate hike projection on the latest data.

The GBP v EUR was trying to hold gains above the 1.1700 level despite the latest data.

Goldman Sachs sees Bank of England hike in May 2022

The investment bank Goldman Sachs gave the pound sterling a boost versus the euro after they brought their Bank of England rate hike forecast forward by more than a year. The move was driven by this week’s stronger-than-expected UK employment and inflation reports.

“The recent data on the UK labour market have been stronger than expected, and indicators imply a smoother furlough unwind than we previously assumed,” said Steffan Ball, Chief UK Economist at Goldman.

The ONS reported on Tuesday this week that employment levels in the UK were back to their pre-crisis levels with a larger than expected increase in jobs into July. Wage growth also increased by 8.3% in July as staff shortages and inflation pressure hiring. Vacancies were also shown to be at a record high, which will help to cushion the ending of the furlough scheme this month.

“Our analysis suggests that underlying wage growth is strong and inflation pressures are firming more than anticipated,” said Ball.

“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,” added Ball.

The end result means that Goldman Sachs are expecting the BoE to start interest rate hikes next May as their baseline forecast. The bank previously said that the first increase would come in the third quarter of 2023.

UK inflation crushes expectations with record increases

The pound was also driven higher this week by a Wednesday release of core inflation which said that prices rose 3.2% after analysts had expected 2.9%.

The increase of 1.2% in the annualized rate is the largest since records began in January 1997. The largest strain on prices came from restaurants and hotels, given the low base created by the government’s Eat Out to Help Out scheme a year earlier. Energy prices, used cars, and food have also been showing stubborn increases.  On a monthly basis, CPI increased 0.7% in August, compared with a reading of 0.0% m/m in July.”

The Bank of England will meet on 23rd September and the central bank expects annual price growth to peak higher than expected around 4% and could be enough to warrant the withdrawal of some stimulus.

The Bank of England will be in no hurry to press stimulus reductions as the UK enters the autumn season and a rise in virus cases is expected. The GBP to EUR was boosted by the UK rate outlook but is vulnerable under the 1.1800 level.