EUR/GBP advances as soft UK labour data fuels BoE interest rate cut bets

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EUR/GBP advances on Tuesday as the British Pound (GBP) weakens across the board following softer UK labour market figures, which strengthened the case for Bank of England (BoE) interest rate cuts.

EUR/GBP rises as soft UK jobs data fuels BoE rate-cut bets.
UK Unemployment Rate hits its highest level since early 2021.
Focus shifts to UK inflation data due on Wednesday.

EUR/GBP advances on Tuesday as the British Pound (GBP) weakens across the board following softer UK labour market figures, which strengthened the case for Bank of England (BoE) interest rate cuts. At the time of writing, the cross is trading near 0.8722, up around 0.30% after remaining under pressure for four consecutive days.

Data released by the UK Office for National Statistics (ONS) painted a softer picture of labour market conditions. The Claimant Count Change climbed by 28.6K in January, overshooting the 22.8K forecast and accelerating sharply from December’s revised 2.7K increase (previously 17.9K).

Meanwhile, Employment Change for the three months to December eased to 52K from 82K previously. More notably, the ILO Unemployment Rate rose to 5.2% in the three months to December, above the 5.1% forecast and prior reading, marking its highest level since early 2021.

Average Earnings Excluding Bonus rose 4.2% in the three months to December from a year earlier, matching market expectations but slowing from the previous 4.4% pace. Meanwhile, Average Earnings Including Bonus increased 4.2% YoY, easing from 4.6%.

Following the data release, markets now fully price in two BoE rate cuts this year, with the first reduction seen as early as March. Attention now turns to the Consumer Price Index (CPI), Producer Price Index (PPI) and Retail Price Index figures due on Wednesday, which could further influence expectations around the pace and timing of monetary policy easing.

According to a Reuters poll published on Monday, conducted between February 10-16, 41 of 63 economists expect the BoE to cut the Bank Rate by 25 basis points (bps) to 3.50% in March, while 19 see the first reduction being delivered in April.

In the Eurozone, the latest ZEW Survey – Economic Sentiment for February came in at 39.4, falling short of the 45.2 forecast and slightly below the previous 40.8 reading. Meanwhile, Germany’s ZEW Economic Sentiment Index eased to 58.3 in February, down from 59.6 previously and falling short of the 65.0 forecast.

However, the weaker ZEW data had little impact on the Euro, as a more dovish Bank of England outlook prompted traders to trim GBP exposure, helping EUR/GBP remain supported.

(This story was corrected on February 17 at 13:30 GMT to say that the previous reading of the Eurozone ZEW Survey – Economic Sentiment was 40.8, not 40.0.)

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect the Pound?

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.