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Pound Supported by Wages: GBP/EUR, GBP/AUD Exchange Rates Surge

October 16, 2018 11:15 am | Modified October 16, 2018 1:50 pm
AUD, Central Banks, EUR, GBP | BY Ben Scott

The Pound to Euro (GBP/EUR) exchange rate and the Sterling to Australian Dollar (GBP/AUD) currency pair jumped on Tuesday after positive UK labour data came to light.

British wage growth made an impressive jump to 3.1% on the year in the three months through August, defying forecasts to remain at 2.9%. The ecostat marked a nine-year high in wage growth, the best level since the depths of the financial crisis in 2009. Additionally, the UK Unemployment Rate held steady at a 43-year low.

However, despite earnings marking their quickest rate of expansion since 2016, British workers are still earning less than before the crisis in real terms.

However, with Brexit in the spotlight this week, Sterling exchange rate gains could be short-lived.

Global Reach Chief Economist Eimear Daly commented:

‘The Pound moved immediately higher against both the EUR and USD on the release, on increased UK rate support. The data adds to evidence that UK growth remains firm and the economy is approaching its supply capacity. The move higher in GBP may be short-lived. Sterling valuation is much more determined by Brexit developments than UK fundamentals these days.’

Meanwhile, in the Euro Area, the latest ZEW Eurozone Economic Sentiment Index slipped well below expectations, coming in at a dismal -19.4 in October. Economists had forecast a smaller decline from -7.2 to -9.2. The ZEW German Expectations Survey also noted a disappointing cliff-edge drop, falling from -10.6 to -24.7.

The reason for the decline? Investor confidence has stumbled amid a stock-market selloff and global trade tensions which could damage economic expansion efforts.

President of the ZEW Centre for European Economic Research, Achim Wambach, commented:

‘Expectations for the German economy are dampening above all due to the intensifying trade dispute between the U.S. and China. A further negative influence on economic and export expectations is the danger of a “hard Brexit”, which is becoming ever more likely. Last but not least, the situation of the governing coalition in Berlin is perceived to have become more unstable.’

German Chancellor Angela Merkel’s allies were defeated in Bavaria in the recent state election which posed questions surrounding the longevity of Merkel’s government.

Down Under, the Reserve Bank of Australia (RBA) released its latest meeting minutes. Eight policymakers discussed lending conditions, fretting that further tightening could be ahead.

The minutes read:

‘Members observed that while the regulators had already overseen a tightening of lending standards, and a degree of tightening of lending standards had been implemented by banks in anticipation of the commission’s findings, it was possible that banks could tighten lending conditions further given the issues raised in the report.’

The RBA has been contending with high levels of consumer debt for some time, as well as hot property prices. The International Monetary Fund (IMF) very recently reiterated its concerns on Australia’s economy with high debt and house prices, especially with the possibility for asset valuations to ‘adjust abruptly’ on the back of more US interest rate increases.

Update: The Pound continued to climb during Tuesday afternoon, reaching highs of 1.1424 against the Euro (GBP/EUR), and 1.8563 against the Australian Dollar (GBP/AUD). Tomorrow, investors will be looking at the UK’s latest inflation reading. The September ecostat is expected to slip from 2.7% to 2.6%, while the core measure cools from 2.1% to 2.0%. However, declines have been forecast before and resulted in a rise instead, so investors will be keen to see if economists’ forecasts are correct.

The Pound to Euro (GBP/EUR) exchange rate is trending in the region of 1.1416, while the Pound to Australian Dollar (GBP/AUD) exchange rate trades at 1.8545.

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