Sharp fall in UK jobless rate drives Euro lower against British Pound

• 0.8407 in focus as Euro slips and robust UK jobs figures lift British Pound.
• 4.7% UK ILO Unemployment Rate marks a decline in the three months to August.
• Eurozone countries face spillover from France’s fiscal concerns.

0.8407 is the Euro’s approximate level against the British Pound. The Euro (EUR) has lost 0.2% against the British Pound (GBP) after the United Kingdom (UK) released labour market figures for the three months to August. Hiring improved significantly, while the unemployment rate fell.

New hires totalled 102K, up from 67K in the quarter to July, according to the figures. Rather than holding at the expected 4.9%, the ILO Unemployment Rate fell to 4.7%. Unemployment is now at its lowest rate in over a year.

At 3.7% Year-on-Year (YoY), Average Earnings Excluding Bonuses exceeded both the forecast and the previous 3.6% reading. This is a key gauge of wage growth. Including bonuses, annual earnings growth slowed to 3.7%, below the expected 3.8% and the prior 3.9%.

With September’s UK Consumer Price Index (CPI) release due on Wednesday, financial markets are preparing for further British Pound volatility.

2027 inflation to stay elevated as UK prices climb, Deutsche Bank expects

A near-term re-acceleration in UK inflation is expected by Deutsche Bank economists. They forecast September will deliver “its highest rate all year,” with “headline CPI rising to 3.49% y-o-y, with core CPI pushing to 2.74% y-o-y.” Their services forecast is: “Services CPI, we expect, will also rise, picking up pace to 3.71% y-o-y on stronger base effects.”

Further ahead, “price pressures” are likely to “increase further,” Deutsche Bank cautions. It cites the fact that “energy prices remain on an ascent” and that “lower harvests have already starting to show up in food cost price data.” The bank consequently states that “our updated projections see CPI taking another step up, with 2027 CPI averaging 3.7% (previously, 3.5%) from 3.2% this year,” adding that “headline RPI, we expect, will rise from 3.7% y-o-y to 5.2% (previously, 4.8%).”

Comparing their estimates with the Bank of England’s, the economists acknowledge that “our projections sit broadly above the Bank’s forecasts with the exception of two categories: core goods CPI and food & non-alcoholic beverages CPI,” and say they “break down how our projections look relative to the Bank of England’s below.” Deutsche Bank summarises its outlook as follows: “We see headline CPI still making its way higher from here, peaking at 4.3% y-o-y in February next year. For the full year now, we see headline CPI averaging 3.2% y-o-y in 2026 and rising to 3.8% y-o-y next year (previous: 3.5%).”

Russia-Ukraine tensions and mounting concerns over French public finances continue to weigh on the Euro.

French instability spreads bond pressure and strains Euro

The latest French political upheaval has spread through European markets, according to Deutsche Bank analysts. They observe that “those market concerns around French debt cascaded across other countries and asset classes too.” In sovereign debt, “the Italian 10yr spread over bunds was also up +4.7bps on the day to 111bps, whilst Spain’s was up +1.2bps to 62bps.” Equities also came under pressure: “the STOXX Banks index (-2.07%)” reached a four‑month low, alongside “even bigger declines for the French banks, including Société Générale (-3.41%), Crédit Agricole (-2.64%) and BNP Paribas (-2.48%).” Turning to currencies, Deutsche Bank notes that “all that caused fresh pressure for the Euro itself, which weakened -0.23% against the US Dollar to close at $1.1213.”

For Rabobank’s RaboResearch team, the fixed income response amounted to “an ugly bond reaction to the ugly protests and looting in France (and Belgium and Italy, following earlier peaceful protests in Spain and Portugal) with 10-year French yields +13bps, Italian +8bps, and German +3bps.” The speed of the tightening in funding conditions is evident in its observation that “even if we only focus on fiscal metrics, French 10-year borrowing costs are now half a rate hike higher than Friday,” the team stresses.

Policymakers now face what Rabobank describes as “the hypothetical whispered realpolitik binary”: a choice “between the ECB bailing France out if needed, at a cost to the Euro and the fury of Germany, and not doing so at a cost to EU economic, political, and market stability.” Another possibility is posed as a question: “But could the ECB bail everybody else out from French contagion and leave Paris to sort out its mess?” Rabobank’s conclusion is that “whatever happens now, more volatility seems far more likely than a ‘reversion to mean’.”