Euro holds gains against British Pound as UK unemployment disappoints

During early European trading hours on Tuesday, the EUR/GBP cross posted modest gains near 0.8550. The British Pound (GBP) experienced some selling pressure against the Euro (EUR) following the release of UK employment data. Traders are preparing for the upcoming ZEW Survey from Germany and the Eurozone data later in the week. On Wednesday, attention will shift to the UK inflation report.

The Office for National Statistics (ONS) published UK Unemployment Rate data on Tuesday, showing the rate remained steady at 4.9% for the three months ending June. This figure was above the market consensus of 4.8%. However, the number of individuals claiming jobless benefits decreased by 11K in July, whereas it had previously revised down to 6.4K and met expectations of an 11.2K increase.

The Employment Change data revealed a June figure of 83K, compared to 147K in May. As a result, the British Pound dipped in response to the UK jobs data. Financial markets indicated a 25 basis points interest rate hike by the end of 2026. Regarding the Euro, analysts from Scotiabank predict the recent "firming trend in the EUR" signifies economic resilience in the Eurozone despite energy-related headwinds.

The European Central Bank (ECB) is expected to raise interest rates by 25 basis points at its September monetary policy meeting. ECB President Christine Lagarde cautioned last month that renewed Middle East hostilities and rising oil prices could pose upside risks to the Eurozone inflation outlook. In the daily chart, EUR/GBP exhibits a mild bearish near-term outlook as it trades below the 100-day simple moving average (SMA) and the 20-day Bollinger middle band.

The currency is also below the upper Bollinger band, while the Relative Strength Index (14) stands at 48.5, indicating neutral momentum and suggesting that downside pressure remains but lacks strong conviction for a sharp selloff. Sellers could potentially profit if the pair extends its decline, starting from the lower Bollinger band at 0.8530.

On the upside, immediate resistance is observed at the 20-day Bollinger SMA near 0.8555, followed by the upper Bollinger band close to 0.8582, with a more substantial cap at the 100-day SMA at 0.8620. A sustained break above this cluster of overhead levels would help alleviate the current bearish bias. High employment rates, or low unemployment, can have positive implications for consumer spending and economic growth, consequently boosting the value of the local currency.

A very tight labor market, where there is a shortage of workers for open positions, may also influence inflation levels and monetary policy, as low labor supply and high demand lead to higher wages. The speed at which salaries grow in an economy is crucial for policymakers, as high wage growth means households have more money to spend, typically resulting in increased consumer goods prices.

Unlike more volatile sources of inflation, such as energy prices, wage growth is considered a key component of underlying and persistent inflation, as salary increases are unlikely to be reversed. Central banks worldwide closely monitor wage growth data when deciding on monetary policy, with the weight assigned to labor market conditions varying based on each central bank's objectives.

The US Federal Reserve, for instance, has a dual mandate of promoting maximum employment and stable prices, while the European Central Bank's (ECB) sole mandate is to keep inflation under control. Nonetheless, labor market conditions remain an essential factor for policymakers due to their significance as a gauge of economic health and their direct relationship with inflation.