The Pound to US Dollar (GBP/USD) and Pound to Euro (GBP/EUR) exchange rates fell on Wednesday, after making gains in Tuesday’s session. The GBP/EUR exchange rate reached a seven-month high in Tuesday’s trading as it looked like a Brexit deal might be on the cards.
Brexit Optimism on Irish Backstop and UK Wage Growth Boosts Pound Exchange Rate
News that negotiators might have come to an agreement on the Irish backstop issue buoyed investor sentiment in the Pound exchange rate. Also supporting Sterling was economic data which showed wage growth had reached an almost 10-year high. Wages excluding bonuses hit 3.2% in the three months through September on the year according to the Office for National Statistics (ONS).
ONS Senior Statistician Matt Hughes said:
‘With faster wage growth and more subdued inflation, real earnings have picked up noticeably in the last few months.’
However, Wednesday hasn’t been as positive for Sterling as some investors had hoped. While Theresa May holds a crunch time Cabinet meeting to discuss the fate of the UK outside of the EU, UK Consumer Price Index (CPI) numbers have disappointed. The UK’s October inflation reading resided at 2.4% in October on the year, the same as September, rather than climbing to 2.5% as forecast. The core measure also remained below the 2.0% expectation, at 1.9%.
Analyst Laith Khalaf said:
‘Brexit is still the elephant in the room when it comes to the future path of inflation, and consequently of monetary policy. That’s because the Pound now waxes and wanes with the Brexit negotiations and that has a big impact on how much UK consumers pay for imported goods. What the market sees as a positive Brexit deal will deliver a higher Pound and lower inflation.’
In more positive news, the UK’s House Price Index noted a 3.5% increase in September; higher than the 3.1% in August and the 3.2% expectation.
US Inflation Rises as Eurozone Growth Slumps and German GDP Contracts
Across the pond, US inflation rose from 2.3% to 2.5% on the year in October–the biggest increase in nine months. Meanwhile, the Eurozone showed Gross Domestic Product (GDP) growth had remained at 1.7% on the year, with the third quarter only posting 0.2% expansion. In Germany, GDP growth contracted by 0.2% in the third quarter; the first time the Eurozone’s powerhouse has contracted since 2015.