GBP/EUR: Will UK Wage Growth Data Pull Pound Lower?

In the absence of any high impacting economic data from either the UK or the eurozone, the pound euro exchange rate focused on Brexit developments and the escalating US—Sino trade dispute. The pound fell versus the euro steadily across Monday, hitting a low of €1.1525.

What do these figures mean?
When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute. If the euro amount increases in this pairing, it’s positive for the pound. Or, if you were looking at it the other way around:1 EUR = 0.87271 GBPIn this example, €1 is equivalent to approximately £0.87. This measures the euro’s worth versus the British pound. If the sterling number gets larger, it’s good news for the euro.

As the government enters its sixth week of cross party talks with the opposition party, the talks have as good as stalled. Whilst Labour is insisting on a public vote as party of the Brexit package, Downing Street remains fiercely opposed to any form of referendum being attached to a Brexit deal. The two sides are struggling to advance past this obstacle. Without an agreement between the two sides, Theresa May is unlikely to push a Brexit deal through Parliament.

Why is a “soft” Brexit better for sterling than a “hard” Brexit?
A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.

Today investors could look towards the UK jobs report which could add further pressure to the pound. Analysts are expecting unemployment to remain steady at 3.9%. However, analysts expect wage growth, the most closely watched component of the report to show that wage growth slipped in the three months to March to 3.4%, down from 3.5%. The previous months reported more jobs added and wage growth increasing at the fastest pace in more than a decade. The slight easing could pull the pound lower.

How does strong jobs data boost the currency?
It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the goods and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.

Euro Steady, Investors Look To ZEW Sentiment Data

The euro traded broadly flat across the board, albeit stronger than the pound. Whilst there was no data for euro investors to digest, the US—Sino trade war attracted attention. On Monday China retaliated with tariffs on $60 billion worth of US goods. This move came following the US increasing tariffs to 25% on $200 billion worth of Chinese imports. The escalating trade war is hitting market sentiment which had been driving investors towards “safe haven currencies” such as the dollar and the Japanese yen.

Germany is particularly sensitive to developments in the trade dispute. Germany exports a large number of cars to China, as the Chinese economy has been under fire from President Trump the number of cars that Germany exports to China has declined. This is just one example of many.

The ZEW Sentiment data will be in focus. Analysts are expecting the survey to show sentiment improving in May. An improvement in sentiment could help the euro strengthen.

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