EURGBP Exchange Rate Trades at Three-Month Lows

EUR GBP Higher as Traders Await PMIs and BoE

The EURGBP exchange rate was lower on Thursday by -0.10% despite a better-than-expected drop in the German unemployment rate. That was likely tempered by a surge in inflation above analysts’ expectations. The UK saw a dip in mortgage approvals but that was expected after house prices cooled in July after the removal of a tax cut for buyers.

The EUR to GBP rate now trades at 0.8510 with the UK seeing a second day of rising virus cases.

German unemployment beats expectations

Germany’s unemployment rate slipped to 5.7% in July, according to the country’s federal labour agency. The country’s jobs market saw an improvement as Europe’s largest economy rebounded from lockdowns.

The number of unemployed in the country was seen dropping by 91,000 this month, which was a big improvement on analysts’ expectations for a 28,000 drop.

“The situation in the jobs market is continuing to improve. Despite the beginning of the summer holidays, there has been another significant decrease in joblessness and underemployment,” Detlef Scheele, head of the labour agency said.

“The employment figures continue to grow, and businesses are now looking for more employees,” he added. “Despite the current stagnation of consumer confidence, the domestic economy will make a positive contribution to overall economic development in the second half of the year. Consumers with full wallets will also ensure that this happens.”

Restaurants, shops and visitor attractions have been open in Europe’s largest economy since restrictions were eased in May. One headwind has been the rise in case numbers again in recent weeks, with Europe lagging the UK on vaccinations.

A seven day drop in virus cases in the UK was also seen reversing for a second day with the UK posting over 31,000 cases yesterday.

German inflation surges to highest level since 2008

German inflation was seen surging to a faster-than-expected pace of 3.8% in July, according to early data.

The move marks the first time that Germany’s inflation has breached 3% since 2008. The last time prices were seen higher was way back in 1993 when the price index hit 4.3%.

Federal statistics agency Destatis blamed the year-on-year price hike on higher energy prices and the full base effect from the sales tax cut in 2020, which recently ended and is showing up in the data for the first time.

Analysts were looking for a smaller jump in the July figure to 3.3% but consumer prices worldwide have been hot. Central bankers are trying to put this down to one-off effects linked to the pandemic, but that helps their cases to keep interest rates at zero into 2023 or 2024, which is really a stealth bailout of government budgets with the virus pushing debt levels to record highs.

The ECB recently raised its inflation target to 2% and said it would accept a temporary overshoot. That will be interesting to watch in the months ahead if the figures prove to be less than transitory.