EURGBP Starts the Week from New Yearly Low

The EURGBP exchange rate closed last week at a new low for the year after traders digested the Bank of England policy statements on Thursday. The EUR V GBP saw a low of 0.8469 on Friday and closed just above. Monday is quiet on the data front with Swiss employment and the German trade balance.

The EUR to GBP rate opens the week a little higher at 0.8479 but the euro is under pressure.

UK two-year Gilts drive sterling higher

UK two-year gilt yields rose to their highest level since April 2020 on Friday after the Bank of England mentioned “modest” policy tightening.

Two-year gilt yields rose to a high of 0.162%, which is close to levels last seen during the market panic in March 2020. At Thursday’s interest rate and policy update, the BoE set out a process for tapering its bodn buying program, but that won’t be before it has raised its benchmark interest rate to 0.5% from the current 0.1%, which markets do not expect until 2023.

The central bank said it expected some modest tightening of policy to be needed over the next 2-3 years, and that has seen markets readjust their expectation for a first rate rise, to 0.25%, which is now expected to be May 2022 instead of August 2022.

“We do think it’s more likely than not that some moderate tightening of policy … will be necessary,” BoE Deputy Governor Ben Broadbent said on Friday, adding that policymakers would be paying close attention to labour shortages.

Investors see the bank hiking interest rates long before their ECB counterparts and that is putting the euro versus pound exchange rate under pressure.

UK recovery still unsteady says BDO

The reopening of the services sector led to a surge in the UK job market last month, but that could mean more staff shortages, according to the BDO,

The BDO said businesses continue to talk of labour shortages, in part caused by the pandemic and Brexit, which would hint at a strong job market for job seekers.

This staff shortage “could well lead to a long-term trend of rising wages, which is already a contributory factor in the record high inflation index figure,” said the BDO.

The group cited the end of the furlough scheme in September as another potential cause of instability. The higher inflation figures are also an issue that is affecting optimism amongst British businesses.

Another report has noted staff shortages and said that employers are desperate to attract new workers in a tight labour market.

KPMG and the Recruitment and Employment Confederation (REC) said in their survey of the UK jobs market that companies were raising pay levels at record levels. Average starting salaries at UK companies jumped by the most in its 24-year history, according to the report.

The EUR v GBP has now seen a new low for the year and the next big support level is at the March 2020 lows.

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