Euro declines against British Pound as UK jobless rate falls sharply

• Euro falls to near 0.8407 as strong UK job data strengthens British Pound.
• The UK ILO Unemployment Rate falls to 4.7% in three months ending August.
• French fiscal concerns extend across Eurozone nations.

The Euro (EUR) slides 0.2% to near 0.8407 against the British Pound (GBP), following the release of the United Kingdom (UK) labor market data for three months ending August. The labor market data has shown a significant improvement in job hiring and a decline in the jobless rate.

The data showed that employers hired 102K fresh workers, higher than 67K in quarter ending July. The ILO Unemployment Rate dropped to 4.7%, while it was expected to remain steady at 4.9%. This is the lowest jobless rate figure seen in over a year.

Average Earnings Excluding Bonuses, a key measure of wage growth, arrives at 3.7% Year-on-Year (YoY), higher than estimates and the previous reading of 3.6%. The wage growth measure including bonuses dropped to 3.7% YoY from expectations of 3.8% and the prior release of 3.9%.

Financial markets brace for more volatility in the British Pound as the UK Consumer Price Index (CPI) data for September is scheduled to be published on Wednesday.

Deutsche Bank sees UK inflation pushing higher and staying elevated into 2027

Economists at Deutsche Bank expect UK inflation to re-accelerate in the near term, projecting that September will mark “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.” They also look for “Services CPI, we expect, will also rise, picking up pace to 3.71% y-o-y on stronger base effects.”

Looking beyond the immediate print, Deutsche Bank warns that “price pressures” are likely to “increase further,” noting that “energy prices remain on an ascent” and that “lower harvests have already starting to show up in food cost price data.” Against this backdrop, the bank says “our updated projections see CPI taking another step up, with 2027 CPI averaging 3.7% (previously, 3.5%) from 3.2% this year,” while “headline RPI, we expect, will rise from 3.7% y-o-y to 5.2% (previously, 4.8%).”

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 indicate they “break down how our projections look relative to the Bank of England’s below.” Summing up the trajectory, Deutsche Bank concludes: “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%).”

Meanwhile, the Euro remains under pressure due to Russia-Ukraine tensions and heightened French fiscal worries.

French turmoil fans bond contagion and Euro stress

Analysts at Deutsche Bank highlight how the latest bout of French political turmoil has rippled across European markets, noting that “those market concerns around French debt cascaded across other countries and asset classes too.” They point out that “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.” Equity markets were similarly hit, with “the STOXX Banks index (-2.07%)” dropping to a four‑month low and “even bigger declines for the French banks, including Société Générale (-3.41%), Crédit Agricole (-2.64%) and BNP Paribas (-2.48%).” In FX, Deutsche Bank adds that “all that caused fresh pressure for the Euro itself, which weakened -0.23% against the US Dollar to close at $1.1213.”

Rabobank’s RaboResearch team characterises the fixed income reaction as “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.” They stress that “even if we only focus on fiscal metrics, French 10-year borrowing costs are now half a rate hike higher than Friday,” underscoring how quickly funding conditions have tightened.

Looking ahead, Rabobank frames what it calls “the hypothetical whispered realpolitik binary” facing policymakers as 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.” The bank also raises the question: “But could the ECB bail everybody else out from French contagion and leave Paris to sort out its mess?” Against that backdrop, Rabobank concludes that “whatever happens now, more volatility seems far more likely than a ‘reversion to mean’.”