Above: The amount of unemployed in the UK is decreasing.
The pound sterling (GBP) has shot higher against the euro on signs that the outlook for the UK consumer has improved considerably in the final half of 2014.
Rising wages and falling inflation simply puts more money in the pockets of consumers, and with the UK being a consumer-led economy this should bode well for the economic outlook.
Sterling shot higher on Thursday when UK retail sales data confirmed the improving trend and recorded a 1.6% (m/m) jump in November which overshadowed the 0.3% (m/m) consensus forecast.
The Bank of England will ultimately have to start seriously considering bringing forward their first interest rate hike. We are currently pencilling in December 2015 for the hike, but if markets start pencilling in an earlier date sterling will appreciate in value.
- Following the data the British pound to euro exchange rate (GBP/EUR) was trading a full percentage higher on a day-on-day comparison having reached 1.2746. On Friday the pair is converting at 1.2716. On Friday the rate is seen at 1.2753.
- The euro to pound on the other hand (EUR/GBP) is seen 0.7842.
Be aware that the quotes listed above are taken from the wholesale market and subject to a discretionary charge by your bank. An independent FX provider will however guarantee to underut your bank and in some instances deliver up to 5% more currency. Find out more here.
Wages Up, Inflation Down
Wage growth is picking up, highlighting how a further improvement in the labour market is feeding through to the benefit of households.
Real regular pay, excluding bonuses but taking inflation into account, is rising for the first time since September 2009.
According to Markit - the financial information service provider - the unfolding scenario will ultimately play positive for the sterling via shifts in interest rate policy at the Bank of England:
“Faster pay and the improved outlook for household finances will add to pressure on policymakers to start the process of lifting interest rates off the current all-time low.
“The latest minutes from the Bank of England’s Monetary Policy Committee remained split on the appropriate policy course, with Martin Weale and Ian McCafferty again voting to take an early pre-emptive hike in interest rates, though others saw lower oil prices adding to the case for rates to remain on hold.”
That said, gains in the pound euro exchange rate will have been constrained by the observation that the additional downward pressure on inflation from lower oil and commodity prices reinforces the view that interest rates will rise only very gradually, even if wage growth surprises to the upside next year.
Bank of England See Positives in Falling Oil Prices
The minutes from the 4 Dec MPC meeting noted that the "risk that inflation might persist below the target for a longer than expected" had "if anything, been exacerbated by the continued decline in oil prices."
But overall, the Committee felt the sustained fall in oil prices would boost growth for the UK and its trading partners.
Euro Exchange Rates Slip
The euro slipped against the dollar ahead of this afternoon’s Fed statement and press conference by Janet Yellen, which could see the Fed remove its “considerable period” language form its communiqué.
“Such an outcome today would mark an important step toward more normal monetary policy in the U.S. and would contrast expectations for additional monetary stimulus from the ECB in early 2015,” notes Omer Esiner at Commonwealth Foreign Exchange.
Greece begins its process for selecting a new president today, which could keep political uncertainty in the nation elevated over the coming weeks.
Prime Minister Samaras has taken a risky gamble on holding the presidential election early.
“Failure of his candidate to win the needed votes could result in a snap parliamentary election, which could then see fringe and extreme anti-euro parties gain considerable strength in the government,” notes Esiner.
While the Fed should set the market’s tone into the year-end, the euro remains vulnerable over the long term.