EUR/GBP rebounds after UK unemployment data, but Euro remains vulnerable

• EUR/GBP rebounded from multi-year lows after weak UK labor market data sparked a sell-off in the Pound.
• However, the pair remains pressured by risks to the Eurozone outlook as the US prepares to implement tariffs.
• Political uncertainty in Germany and the Pound’s positive relationship with risk are additional bearish factors for EUR/GBP.

EUR/GBP rebounds from two-and-a-half-year lows around the 0.8200 area to trade back around the 0.8330 area on Wednesday, after UK labor market data showed a rise in the unemployment rate, which which increased speculation that the Bank of England (BoE) could cut interest rates in December.

The UK central bank was previously expected to be one of the few major central banks not to cut rates at the end of the year due to persistently high inflation. The expectation that interest rates would remain relatively high in the UK had been a supportive factor for the British Pound (GBP) as they attract greater foreign capital flows.

The UK unemployment rate rose to 4.3% in the three months to September from 4.0% in the previous period, according to data from the Office for National Statistics (ONS), published on Tuesday. The reading was also well above economists’ expectations of 4.1%. It signaled a weakening labor market and could put pressure on the BoE to cut interest rates to stimulate borrowing, growth and job creation.

That said, other UK employment data wasn’t too bad, suggesting the British Pound (GBP) could recover and EUR/GBP’s upside is likely to remain limited. UK average earnings, including bonuses, rose 4.3% from a previously upwardly revised 3.9% and an expected 3.9%. UK average earnings excluding bonuses rose 4.8%, beating estimates of 4.7%, although down from 4.9% previously. Higher wages suggest that inflationary pressures could increase, forcing the BoE to keep interest rates at their current high level, thus strengthening the Pound, with bearish implications for EUR/GBP.

The Euro (EUR) also remains vulnerable due to concerns about growth, the political crisis in Germany and fears that the US will impose tariffs on European imports, further weighing on the pair. President-elect Donald Trump warned he would make the Eurozone “pay a heavy price” for not buying enough American-made goods, suggesting he is working to impose tariffs on Eurozone imports. The imposition of tariffs has led economists to reduce their forecasts for the Eurozone’s Gross Domestic Product (GDP) by “a minimum of 0.3 pp accumulated during 2025-26”, according to Japanese lender Nomura.

The single currency is feeling the pressure of political uncertainty in Germany following the collapse of Chancellor Olaf Scholz’s ruling coalition. The country will hold early elections on February 23, 2025, however, until then, Germany’s political problems will likely be a continued source of risk for the Euro and a downside risk for EUR/GBP.

According to Goldman Sachs analysts, the Pound is more resistant to geopolitical shocks compared to the Euro and this is bearish for the pair. GBP is also more positively aligned with risk and has a “positive global risk beta.” If US stocks continue to rise as a result of the outlook due to the new administration in Washington, this should further support the Pound, suggesting downward pressure for EUR/GBP, which could even revisit its lows of over two years.

(This story was corrected on November 13 at 14:56 GMT to say that UK employment data was published on Tuesday and not Wednesday.)