Euro Update – 24 October 2023

A pause from the ECB and BoC?
GBP
Further evidence of sticky UK inflation could give the BoE cause for concern after headline Consumer Price Inflation (CPI) held firmly at 6.7% on an annual basis during September. Core inflation, on the other hand, ticked moderately higher, rising from 6 to 6.1%, albeit at a slightly lesser pace than had been expected. However, UK inflation still remains higher than that of France, Germany, the US and the EU-27 as a whole.
The UK now looks like it could meet the IMF’s recent expectation of having the highest level of annual inflation among G7 countries this year. The latest IMF forecasts also point to the UK maintaining that position into next year. Whilst headline inflation has been impacted (at least in the short term) by a recent spike in energy prices, consistent wage rises have also played a part in fuelling persistent inflation (see below) as businesses continue to battle to attract workers in the post-COVID era.
Reports this week showed the UK wage growth is now exceeding inflation for the first time in two years, which could point to the cost-of-living crisis beginning to ease. However, the latest figures from the labour market also reflected a sharp decline in job vacancies, which is an indicator of a weakening labour market.
The BoE’s task now will likely be to balance sticky inflation against a weaker labour market and a broadly weakening economic backdrop, reflected in data released this morning showing the decline in Retail Sales. Whilst there remains a high probability that the central bank is set to maintain its recent pause in rate hikes at the next meeting, the BoE will need to remain particularly vigilant in the short to medium term, especially if the recent energy price rises become entrenched.
This week the pound has stayed fairly flat despite GBP/USD having maintained a fairly constant downtrend since the middle of July. Overall, GBP/USD remains close to the 1.2100 region, slightly above the key 1.2000 psychological level. Looking ahead, next week is dominated by the latest UK employment report, combined with key PMI updates for both the Services and Manufacturing sectors.
EUR
German investor morale posted an unexpected boost this week, according to the latest survey released by the ZEW Institute on Tuesday. The economic sentiment index rose to -1.1 from -11.4 during the previous month and the expectations component of the survey increased for the third month in succession. Perhaps helping to spur the positivity has been a gradual slowdown in inflation throughout this year. However, there remain many pockets for concern. The recent Israel/Hamas conflict, for example, which could still help to fuel higher energy costs, were supplies to be impacted for a sustained period.
Having bucked the trend and raised Euro-area interest rates by 0.25% at the conclusion of its meeting last month, the ECB is expected to follow the recent trend elsewhere and pause rates at its current level at this month’s meeting next week. The ECB has hiked rates by 450bps overall since the middle of last year, but ongoing moderation in inflation has helped to ease the pressure for further rate hikes, with recent rhetoric from ECB officials seeming to back that up.
The single currency also looks set to post only its second upside week since July this week, with EUR/USD trading at 1.0575 (as of Thursday afternoon). Indeed, GBP/EUR has also declined below 1.1500 throughout the week, highlighting the single currency’s domination over the pound of late. Aside from the ECB meeting, which is likely to dominate price activity next week for the single currency, key PMI updates are also scheduled throughout the region.