EUR/GBP drops sharply despite BoE’s tight policy impacts labor market

• EUR/GBP extends correction as more rate hikes from the BoE look warranted.
• The aggressive rate-tightening cycle by the UK central bank dampens the labor market.
• Eurozone Sentix Investor Confidence surprisingly improves due to easing inflation and tight labor market.

The EUR/GBP pair weakens after the upside momentum fades. The cross declines towards the round-level support of 0.8600 as the Bank of England (BoE) leaves the door open for further policy-tightening ahead.

Last week, the BoE raises interest rates further by 25 basis points (bps) to 5.25%. The central bank elevates policy rates for the 14^th time in a row amid the fight against the stubborn Consumer Price Index (CPI). Inflation in the United Kingdom economy softens to 7.9% from its peak but fears of persistence deepen as global oil prices recover.

Meanwhile, the aggressive rate-tightening cycle by the UK central bank dampens the labor market. UK firms slowed down permanent staff hiring last month by the most since mid-2020 due to rising concerns about the economic outlook, per a survey by the Recruitment & Employment Confederation (REC) and KPMG, Reuters reported.

REC Chief Executive Neil Carberry said the jobs market remained "fairly robust" despite the slowdown in permanent placements.

About the inflation outlook, BoE chief economist Huw Pill said on Friday that successive interest-rate hikes are cooling the labor market and easing inflationary pressures. He further added that higher unemployment and lower vacancies would eventually lead to lower wage growth.

On the Eurozone front, Sentix Investor Confidence for August surprisingly improves to 18.9 while investors were expecting deterioration to -23.4 from July’s reading of -22.5. The confidence of institutional investors in economic prospects improves due to easing inflationary pressures and a tight labor market. Also, interest rates by the European Central Bank (ECB) are expected to peak sooner.