UK and EU at Crosswinds of Critical Data

The recent softness in UK macro data is expected to continue in the jobs and inflation figures, while the Eurozone is seen confirming its dramatic decline in CPI change.

Keeping The Cool

The last meeting of the BOE declined to raise rates as inflation has been coming down, citing signs of loosening in the labour market. The tightness in the jobs market had allowed wages to exceed inflation in recent months, which made it more difficult for the BOE to bring inflation down. If the upcoming data shows continued "cooling" in the labour and price sector, the BOE could be set to keep rates steady, at least for a while.

The disparity in inflation could have been a driving force for widening the interest rate gap between the UK and the EU, as the ECB has essentially committed to keep rates at the current level. The BOE has insisted that inflation will come down quickly, but the forecasts suggest that is yet to be the case, and the UK is set to see prices rising faster than across the Channel. With the futures market on an almost even balance of expectations for another rate hike from the BOE this year, a miss or beat in the coming data points could break the broadly sideways trend for the EUR/GBP that has been the theme for the last couple of weeks.

Data Expectations Vary

On Tuesday, the UK is predicted to report a steady unemployment rate of 4.3% in August, while the Claimant Count is forecasted to jump to 22K from 0.9K. More people seeking unemployment benefits is seen to justify the BOE's view of a loosening labour market. The pace of average earnings growth (including bonus) is expected to slow to 8.0% from 8.5% reported previously. This latter part could challenge the consensus that the BOE will hold steady after its Governor Andrew Bailey admitted over the weekend that he can't explain why wage growth remains so strong and hasn't been affected by the higher rates.

A day later, on Wednesday, the UK will report that its inflation rate will decrease slowly to 6.5% from 6.7% prior. The core rate is predicted to mirror that move, down to 5.9% from 6.2% prior. What could provide some hope for inflation continuing its downward trend is negative PPI Output, with a widening gap to -0.6% from -0.4%. That contrasts with the Eurozone, where the inflation rate is expected to be confirmed at 4.3%, way below the 5.2% reported in August. The core rate is also expected to be affirmed at 4.5%, fitting into arguments of more dovish ECB members, such as the Spanish representative Pablo Hernandez de Cos, who argued that the shared central bank has done enough to bring inflation down.

EUR/GBP Wedge Hangs on Inflation

If inflationary data feed into a more hawkish narrative in the UK, EUR/GBP could continue to trade under 0.8713, with immediate focus on the swing support of 0.8635. Bearish price action could see the structure from the peak of 0.8731 form a flag, wedge or pennant while -possibly- prices remain above 0.8615. Conversely, a wedge formation may be complete already, leading to higher prices.

Source: SpreadEx / EUR/GBP

Key Takeaways

The UK is anticipating a continuation of its recent economic softness in job and inflation figures, while the Eurozone is expected to confirm its sharp decline in CPI. The BOE, citing decreasing inflation and a loosening labour market, has held off on raising rates and could maintain them if the trend continues. The UK's unemployment is expected to remain steady, and the Claimant Count is predicted to rise, supporting the BOE's view of a loosening labour market. However, inflation is anticipated to decrease, in contrast to the Eurozone's expected steady inflation rate. Any disparity in inflationary data could widen the interest rate gap between the UK and the EU, potentially disrupting EUR/GBP.