Pound Euro (GBP/EUR) Exchange Rate Regains Ground on Contrasting BoE and ECB Expectations
(Updated 16:30, 11/8/21) The Pound Euro (GBP/EUR) exchange rate has strengthened after initially slipping this morning in response to soaring German inflation.
After Germany’s latest inflation rate surged to a 28-year high of 3.8%, the Euro (EUR) climbed against the Pound (GBP).
However, as markets digested Germany’s CPI, the Pound Euro pair was able to recover.
Germany’s inflation rate for July was primarily pushed up by a temporary VAT reduction from July to December last year and an 11.6% surge in energy prices, meaning the figure is unlikely to put pressure on the European Central Bank (ECB) to tighten monetary policy.
In light of this, Sterling’s recovery seems to be driven by the contrast between the ECB’s outlook and that of the Bank of England (BoE).
The ECB has remained committed to its ultra-accommodative monetary policy, and the latest CPI from Germany has perhaps highlighted this fact. The BoE, on the other hand, signalled last week that ‘some modest tightening of monetary policy’ may be required in the coming months, which saw the Pound Euro exchange rate hit a 17-month high this week.
With it looking likely that the BoE will tighten policy before the ECB, the Pound was able to regain ground against the Euro this afternoon.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Weakens on German CPI
The Pound Euro (GBP/EUR) exchange rate is softening today after Germany’s latest CPI showed that inflation surged to 3.8% in July, its highest level since 1993.
Meanwhile, an absence of UK data has left the Pound (GBP) somewhat directionless today, though ongoing Covid optimism could be limiting its losses. The GBP/EUR pair is currently trading around €1.179, down 0.3% from yesterday’s 17-month high of €1.182.
Pound (GBP) Subdued amid Lack of Data
The Pound (GBP) is muted this morning, as a lack of UK data leaves GBP investors without much incentive to place aggressive bets.
Yet Sterling may be protected from too steep a downside by the continued optimism around the UK’s progress out of the coronavirus pandemic, despite warnings that herd immunity is ‘not a possibility’.
Giving evidence to MPs on Tuesday, Professor Sir Andrew Pollard, director of the Oxford Vaccine Group, said that herd immunity was ‘mythical’. Pollard explained:
‘We know very clearly with coronavirus that this current variant, the Delta variant, will still infect people who have been vaccinated and that does mean that anyone who’s still unvaccinated, at some point, will meet the virus’.
However, Pollard also argued that plans for booster jabs ‘should be scientifically driven’, highlighting that hospitalisations are falling and that a double dose of the vaccine would continue to protect people ‘decades from now’.
These comments come as the decline in UK Covid cases seems to have stalled. But while confidence in the UK’s path out of the pandemic may not be as strong as it was last week, when it was actively driving GBP’s upside, it may still be helping to limit losses today.
Euro (EUR) Firms as German Inflation Soars
The Euro (EUR) is gaining on the Pound and many of its other major rivals this morning after Germany’s inflation rate surged to its highest level since December 1993.
Year-on-year inflation soared from 2.3% in June to 3.8% in July, meeting market expectations and providing support for the single currency.
The surge came as Europe’s largest economy lifted restrictions over the summer, unlocking pent-up demand and allowing more space for business activity to grow.
However, the Euro’s upside may be limited as markets digest the full CPI. A key factor in the huge jump in consumer prices was the low base effect caused by both the coronavirus pandemic and a temporary reduction of VAT rates last year.
Despite German inflation being almost twice the European Central Bank’s (ECB) 2% target, it is unlikely to prompt the ECB to earlier action. The Eurozone’s inflation rate, due out next week, is forecast to print at 2.2%.
In addition, the ECB has remained steadfast in its assertion that inflationary pressures are temporary. As the base effect caused by last year’s VAT cuts was expected by economists, and inflation was also pushed up by an 11.6% surge in energy prices, the ECB will likely be unfazed by the 3.8% figure.
As such, while the single currency is strengthening this morning, its gains could be capped.
Pound Euro Exchange Rate Forecast: If US Inflation Overshoots, GBP/EUR Could Climb
The Pound Euro pair could potentially recover later this afternoon depending on the latest CPI from the US.
US inflation is forecast to have eased from 5.4% to 5.3% in July. However, there is a chance that it could overshoot expectations, as it has done in previous months.
After last week’s impressive non-farm payrolls surpassed forecasts, another surprise jump in inflation would spark expectations that the Federal Reserve may start to consider tapering bond purchases. This in turn would boost the US Dollar (USD) and could weaken the Euro through USD/EUR’s negative correlation.