EUR/GBP advances as soft UK labour data fuels BoE interest rate cut bets

EUR/GBP advances on Tuesday as the British Pound (GBP) weakens across the board following softer UK labour market figures, which strengthened the case for Bank of England (BoE) interest rate cuts. At the time of writing, the cross is trading near 0.8722, up around 0.30% after remaining under pressure for four consecutive days.

Data released by the UK Office for National Statistics (ONS) painted a softer picture of labour market conditions. The Claimant Count Change climbed by 28.6K in January, overshooting the 22.8K forecast and accelerating sharply from December’s revised 2.7K increase (previously 17.9K).

Meanwhile, Employment Change for the three months to December eased to 52K from 82K previously. More notably, the ILO Unemployment Rate rose to 5.2% in the three months to December, above the 5.1% forecast and prior reading, marking its highest level since early 2021.

Average Earnings Excluding Bonus rose 4.2% in the three months to December from a year earlier, matching market expectations but slowing from the previous 4.4% pace. Meanwhile, Average Earnings Including Bonus increased 4.2% YoY, easing from 4.6%.

Following the data release, markets now fully price in two BoE rate cuts this year, with the first reduction seen as early as March. Attention now turns to the Consumer Price Index (CPI), Producer Price Index (PPI) and Retail Price Index figures due on Wednesday, which could further influence expectations around the pace and timing of monetary policy easing.

According to a Reuters poll published on Monday, conducted between February 10-16, 41 of 63 economists expect the BoE to cut the Bank Rate by 25 basis points (bps) to 3.50% in March, while 19 see the first reduction being delivered in April.

In the Eurozone, the latest ZEW Survey – Economic Sentiment for February came in at 39.4, falling short of the 45.2 forecast and slightly below the previous 40.0 reading. Meanwhile, Germany’s ZEW Economic Sentiment Index eased to 58.3 in February, down from 59.6 previously and falling short of the 65.0 forecast.

However, the weaker ZEW data had little impact on the Euro, as a more dovish Bank of England outlook prompted traders to trim GBP exposure, helping EUR/GBP remain supported.