The GBP EUR exchange rate lowered ahead of the European Central Bank meeting this week after employment and inflation figures for the UK. The UK employment report was robust with more jobs created than expected. Inflation was higher for the ninth-consecutive month due to energy and food prices. The European Central Bank hiked rates on Thursday by 50 bps.
The GBP v EUR dipped to 1.1730 ahead of the ECB meeting.
UK jobs market improves, but real wages are a headwind
The UK economy saw better-than-expected employment figures. However, the pound sterling was weaker on the day from falling wages.
The latest data from the Office for National Statistics showed an additional 296,000 workers in employment. The unemployment rate was also at 3.8% after fears that it would increase to 3.9%.
But the problem for sterling was in wages, where actual pay, minus bonuses, was 2.8% lower during the three months to May than a year earlier. That was the sixth-straight decline in a row and the fastest drop since records began in 2001.
The ONS said the figures suggested a “mixed” picture of the jobs market. Demand for labour is still very high as unemployment decreased again; there was another record low for redundancies. This follows recent rises in inflation. Salaries are falling in real terms, including and excluding bonuses.
Wednesday brought the latest UK inflation figures, which were higher than expected at 9.4% against 9.3% predicted.
On Wednesday, economists at Daiwa stated that the data highlighted that the labour market remains tight. A programme of active Gilt sales will likely be underway in the coming months. It was not surprising that BoE Governor Bailey confirmed that a 50bps hike would be part of next month’s discussion.
UK house prices also gained on the month to hit a 12.8% annual rate, but industry insiders expect interest rates to affect pricing as fixed rates expire.
European Central Bank and negative rate cycle
The European Central Bank raised interest rates on Thursday. The move ended the negative rate cycle in the Eurozone. The ECB introduced a new tool to protect the bond yields of indebted countries.
Rabobank was not expecting a 50bps rate hike from the ECB, saying that the argument for a 50bp move did not entirely convince it. A more extensive hike might become a “bargaining chip” in challenging discussions on the anti-fragmentation instrument.
The other big news for the euro this week was the expectation that Russian gas would come back online after Russia’s maintenance.