The Euro to Pound exchange rate is approaching ING's 0.8570 target as UK employment and wage growth slow, raising questions about further Bank of England rate hikes and Sterling's near-term support
The Euro to Pound (EUR/GBP) exchange rate moved closer to the 0.8570-0.8580 range on Wednesday, reflecting renewed pressure on Sterling as the UK labour market continues to lose momentum. According to analysis from ING, the latest employment and wage data from the United Kingdom suggest little reason for the Bank of England to tighten policy further this year, leaving Sterling with less support from interest rate expectations.
Recent figures show that payrolled employment in the UK fell by 86,000 year-on-year in the three months to June, with a provisional estimate for July indicating a further annual decline of 94,000. Job vacancies also slipped to 707,000 in the May-July period, reinforcing the view that hiring demand is cooling. While the overall unemployment rate stood at 4.9% for April-June, the Office for National Statistics cautioned against reading too much into short-term fluctuations. Nonetheless, the direction of travel points to a softer labour market, with private-sector wage growth running below 3% despite a slightly firmer monthly reading.
Bank of England Faces Limited Pressure to Hike
ING's assessment is that the UK jobs market remains subdued, with minimal wage pressures. This environment gives the Bank of England little impetus to raise rates in the coming months. The bank notes that markets are still pricing in around 60 basis points of additional Bank of England hikes into next year, but expects this to be gradually priced out over the next three to six months. As this repricing unfolds, Sterling's yield advantage could erode, allowing EUR/GBP to drift higher toward ING's near-term target zone.
Lloyds Bank has reached similar conclusions, highlighting the persistent weakness in payroll employment and the ongoing decline in vacancies as evidence that hiring demand has materially cooled. While there is no sign of a sharp downturn, the lack of strong wage growth and the steady easing in employment indicators suggest that the Bank of England is likely to remain cautious, especially as inflation pressures moderate.
Exchange Rate Movements and Market Outlook
On Wednesday, the EUR/GBP exchange rate was quoted at approximately 0.8571, up 0.22% on the day. For context, the Pound to US Dollar (GBP/USD) rate stood at 1.3603 (+0.50%), while the Euro to US Dollar (EUR/USD) rate was 1.1659 (+0.72%). ING's forecast points to a bias for EUR/GBP to test the 0.8570-0.8580 area in the near term, with the broader bank consensus projecting a gradual rise toward 0.8700 by the second quarter of 2027. The central 50% of forecasts for that period sits between 0.8600 and 0.8800, indicating expectations for only a modest further weakening of Sterling against the Euro.
Despite the recent move, EUR/GBP has already fallen significantly over the past year, and the longer-term outlook does not suggest a dramatic Sterling decline. The immediate question is whether fading Bank of England rate hike expectations will be enough to push the cross above 0.8580 and unwind some of the strength Sterling has built up. This dynamic is also reflected in other currency pairs, as seen when the Pound's performance against the US Dollar was shaped by shifting expectations for Federal Reserve policy, as discussed in our coverage of Sterling's recent moves against the Dollar.
Understanding Labour Market Signals
Labour market data is a key input for central banks when setting interest rates. In the UK, the Bank of England closely monitors employment, wage growth, and vacancies to assess underlying inflation pressures and the risk of persistent price increases. When job growth slows and wage gains remain modest, the central bank is less likely to raise rates, as the risk of overheating diminishes. However, policymakers also weigh the risk of acting too late if inflation expectations become unanchored. The current environment, with cooling employment and subdued wage growth, points to a cautious approach from the Bank of England, at least in the near term.
