British Pound to Euro Forecast: GBP Recovers on “Mixed” UK Inflation

– Written by


David Woodsmith

STORY LINK British Pound to Euro Forecast: GBP Recovers on “Mixed” UK Inflation

The Pound to Euro exchange rate (GBP/EUR) traded at 1.14673 as markets digested a cooling UK inflation print alongside fresh labour market weakness.

Headline CPI fell to 3.0% y/y, strengthening the case for a March Bank of England rate cut, while unemployment climbed to a five-year high – reinforcing the view that domestic momentum is fading.

Pound Sterling initially slipped to one-week lows as traders ramped up easing expectations, and although inflation is clearly moderating, stubborn services price growth at 4.4% y/y complicates the policy outlook and may prevent a deeper repricing of rate expectations – leaving the Pound vulnerable but not in freefall.

GBP/EUR Forecasts: Softer Jobs and Cooling CPI Strengthen Case for BoE Rate Cuts

The Pound dipped sharply after the latest UK jobs data increased concerns over the outlook, although it did recover from its worst levels.

The data overall reinforced market expectations of a March interest rate cut and triggered increased confidence of at least two cuts this year.

The Pound to Euro (GBP/EUR) exchange rate dipped sharply to 1-week lows near 1.1450 before a recovery to 1.1475.

Data releases will continue to be monitored closely with further key releases this week.

MUFG commented; “The pound is the worst performing G10 currency so far today in response to this data and that underperformance could extend further if the CPI data tomorrow does not show any upside surprises.”

Danske Bank maintains a 12-month GBP/EUR forecast of 1.1240 amid a loss of yield support for the Pound.

The UK unemployment rate increased to a 5-year high of 5.2% in the three months to December compared with consensus forecasts of no change at 5.1%. The single-month reading was close to a 10-year high.

According to the ONS, there was a 6,000 decline in employment for December and a provisional 11,000 decline for January.

ONS Director of Economic Statistics Liz McKeown commented; “The number of workers on payroll fell further in the final quarter of the year, reflecting weak hiring activity, although it is largely unchanged in the latest month.
Importantly, the data also recorded a notable slowdown in average earnings growth to 4.2% from 4.6% and compared with expectations of no change at 4.6%. Underlying earnings growth also slowed to 4.2% from 4.6% with private-sector growth slowing to 3.4%.

McKeown from the ONS added; “Private sector wage growth continues to slow and is at its lowest rate in five years.”

Weak data reinforced expectations of a more dovish Bank of England policy.

Yael Selfin, chief economist at KPMG UK, commented; “Today’s data raises the prospect of the Bank of England resuming cutting interest rates in March. The MPC will be reassured by further evidence of pay pressures easing, and the labour market continuing to soften. The Bank may also want to minimise downside risks to the labour market and lower rates ahead of the next forecast meeting in April.”

ING added; “The UK jobs market is still cooling, even if much of the weakness is concentrated in consumer-facing industries that were most affected by last year’s government policy changes. Wage growth has further to fall, and that’s why we expect Bank of England rate cuts in March and June – and we don’t rule out further moves thereafter.”

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TAGS: Pound Euro Forecasts