Published: November 8th, 2023
Sterling has been up against the Euro in recent days, but one leading Swiss investment bank is advising traders to curb their enthusiasm for an outright rally.
In an analyst note published Monday, forex strategists at Julius Baer said that the Pound to Euro exchange rate would probably settle back under 1.14 by week’s end. UK economic data due on Friday will almost certainly disappoint markets, the bank says, adding downside risks to the pair’s prospects.
The call comes on the heels of a November interest rate decision by the Bank of England, and policy guidance suggesting that British interest rates would stay elevated until at least the end of the year.
GBP was broadly supported in the aftermath of last week's BoE guidance and posted a gain of just over half a percentage point last week. Most of the movement happened on Friday, when traders reacted positively to news that U.S. employment figures had come in below consensus.
Sterling, traditionally considered a 'risk on' currency compared to the Greenback or Euro, stands to benefit further if action on global markets points to an upswing in sentiment.
The GBP/EUR rate experienced some follow-through action, rising to 1.1559 at close on Monday. At time of writing, however those the gains had been given back, suggesting upside will be hard to find and subdued prospects for the pair.
Julius Baer analysts believe this Friday's third quarter UK GDP print will confirm that Blighty’s economy has stayed flat, with leading indicators that will point to a further contraction by the current quarter’s end on 31st December 2023.
'Since Britain’s central bank is looking ahead to flat growth in 2024, we can expect deflationary effects. Significant upside surprises would be required for the BoE to consider further rate hikes in the next few months,’ said the note to investors.
In May, Sterling gave back gains against the Euro after publication of UK wage and employment data suggested Britain’s labour market had reached an inflexion point.
According to the UK Office of National Statistics (ONS), average UK earnings rose by 6.6 per cent in March 2023, slightly less than the 6.7 per cent figure consensus had expected, but still a shade above April's 6.5 per cent.
With bonuses factored in, the figure was 5.9 per cent, which was anticipated, and holding steady at the previous month’s level.
Bank of England (BoE) policymakers had been especially focused on wage data as they look for signals that UK inflation is becoming embedded. While the numbers were robust, Threadneedle Street concluded that wage increases were reaching a peak given recent unemployment rises.
Britain’s unemployment rate increased to 3.8 per cent in March. Consensus had expected unemployment to remain unchanged at the previous month’s 3.7 per cent.
The data signaled that the hot UK labour market was starting to cool, potentially giving the Bank of England breathing space to look again at concluding the current interest rate hiking cycle.
The Pound was unsurprisingly softer in the wake of the data release. The Pound to Dollar rate dropped 0.30 per cent in the 30 minutes following the release to 1.2474. The Pound to Euro rate fell 0.20 per cent in the same period, dropping to 1.1479.
In January, data from the final quarter of 2022 showed that Britain’s economy generated more jobs than anticipated, alongside faster-than-anticipated wage growth. Forex traders were surprised by the labour market growth and began to price in another interest rate hike.
Sterling rose after an additional 27K jobs were generated in the three months to 31st December 2022. That projection was unchanged from the previous month, but consensus believed a slowdown to 5K new jobs was in the works.
Unemployment was unaffected, holding firm at 3.6 per cent. People signing on for unemployment benefits rose by 19.6K, less than the 19.7K markets were expecting.
Average earnings including bonuses grew by 6.3 per cent, a rise from October's 6.1 per cent and beating expectations that a 6.2 per cent print would emerge. Take bonuses away and the rate of wage growth rises slightly to 6.4 per cent.
'GBP is trending slightly higher this morning following a mixed UK jobs print,’ said Barclay’s Forex Strategy Unit in a note to investors. ‘Even as vacancies fall, a shortage of qualified workers is forcing firms to raise pay. Wages are going up at the fastest pace since records began, turning the spotlight on the Bank of England, which may need to hike interest rates again.’
That sense of something new happening was echoed by the ONS, which wrote that current wage growth represented 'the largest rate we’ve seen for the private sector.’
For Threadneedle Street to re-think its policy of raising interest rates, employment and wage growth had to come down first. That would be seen as proof that the economy was cooling, easing domestic inflation pressures.
At the time, Barclays said the situation pointed to another 50 basis-point hike, followed by further increases.
The GBP/EUR rate was under pressure in early 2023 but saw a notable shift to bid after the labour market data print. Investors saw the figures as an indicator that the UK economy was in better shape than believed. GBP/EUR stood at 1.1289 in the hours after publication, having dipped as low as 1.1254 before the release.
In early January, traders were bearish on the Pound, but only insofar as coming US economic data provided inspiration for fresh bids on Greenback exchange rates.
‘A Dollar index move through 103.50 could be sufficient to move GBP/USD back through 1.2100, but it’s our view that the pair will finish the week below 1.2000,’ said Barclays in a January 2023 analyst note.
GBP/USD slid more than ten percent in the latter months of 2022 as gloomy forecasts for Britain’s economy and a reduced pace of Bank of England (BoE) interest rate rises relative to US Federal Reserve kept markets in bearish mode.
