The GBP EUR exchange rate was -0.41% lower on Tuesday despite more robust than expected numbers for the British jobs market. The pressure on the sterling came from the fact that wages tumbled at their fastest rate on record. In Europe, inflation came in as expected, but the Russian gas crisis still looms with Gazprom already cutting off a key customer.
After the recent rally fizzled out, the GBP to EUR hovered around 1.1725
UK pay in freefall as inflation bites into real earnings
Better-than-expected employment figures boosted the UK economy. However, the pound sterling was not as strong on falling wages.
The data released Tuesday showed a 296,000 gain in workers employed, the most significant increase in a year. The unemployment rate was also at 3.8% after fears of a tick higher to 3.9%.
However, the problem was wages, where actual pay – fewer bonuses – were 2.8% lower during the three months to May than a year earlier. That marked the sixth decline in a row and the fastest drop since records began in 2001.
There are also fears that the problem will worsen until inflation rises in the UK. The Bank of England is widely tipped to hike interest rates by another 50bps at their next meeting.
The market pricing, which implied the Bank Rate will achieve 2.75% by end-2022 (150bps of hikes across four meetings) looked overstated. The data offers scarce evidence to back up the MPC’s concerns about “second-round effects of inflation” from higher wage growth.
Euro’ turning into the Lira’ analyst warns
Dorothea Siems, German chief economist, warned of a “decisive week” for the euro as she predicted the ECB could “finally become Europe’s bad bank”.
Ms Siems also warned that the euro was on track to mirror the collapse in the Turkish Lira. She wrote for Welt that the ECB is preparing a turnaround for interest rates. However, she warned that instead of fighting inflation, it would create a new vehicle to assist “debt sinners”, making it Europe’s “bank for junk bonds” with no objections from Germany.
The European Central Bank meets to discuss an interest rate hike on Thursday, but the focus will be on its ‘fragmentation’ tool. As Ms Seims noted, that is to stop the yields on indebted countries from expanding against the German benchmark. A recent increase in Spanish and Italian bond yields ushered in the new tool only weeks after the bank pledged an end to stimulus.
The Eurozone saw inflation figures released today, and core inflation was in-line at 3.7% with the year-over-year inflation rate also at expectations of 8.6%. The market will now look to Thursday’s central bank meeting.
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