Pound Euro Exchange Rate Fluctuates following Surge in UK Inflation

Pound Euro (GBP/EUR) Exchange Rate Wavers as Markets Digest UK CPI

(Updated 15/9/21, 16:00) The Pound Euro (GBP/EUR) exchange rate has fluctuated today as markets digest the UK’s latest inflation rate reading.

While inflation surged to a nine-year high of 3.2%, concerns that prices rises could hit British households hard offset the upside. In addition, high inflation is expected to ease next year, which some analysts think means the Bank of England (BoE) won’t hike rates until 2023.

The Euro (EUR), meanwhile, may have felt some pressure from its negative correlation to the US Dollar (USD) after US industrial production rose above its pre-pandemic level, giving USD a modest boost.

Another factor that could be introducing some volatility into the Pound Euro pair is the UK government’s ongoing cabinet reshuffle, which has so far seen the housing, justice and education secretaries all sacked.

At the time of writing, GBP/EUR is trading at around €1.170 – virtually unchanged from its opening rate – having ranged between €1.168 and €1.172.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Muted as CPI Comes with Caveats 

The Pound Euro (GBP/EUR) exchange rate is trading mostly sideways today, as the UK’s surge in inflation is offset by domestic economic concerns. 

The Euro (EUR), on the other hand, is standing firm thanks to a fairly risk-on market mood. Recent industrial production figures from the Eurozone also seem to be supporting the single currency, which is climbing against the Pound (GBP) at the time of writing.

Pound (GBP) Subdued despite Soaring Inflation 

The Pound is trading in a narrow range against the Euro (EUR) this morning despite a huge surge in UK inflation. 

UK inflation soared to a near ten-year high of 3.2% in August, up from 2% in July and above expectations of 2.9%. The 1.2% jump is the largest ever recorded. 

The figures initially boosted Sterling, with a surge in inflation potentially increasing the likelihood of the Bank of England (BoE) tightening monetary policy. 

However, this may be offset slightly by the fact that the Office for National Statistics (ONS), who published the figures, said the rise was temporary, with a sharp rise in food and drinks prices year-on-year caused by the government’s Eat Out to Help Out scheme last August. 

Paul Dales, Chief UK Economist at Capital Economics, explains: 

‘About 0.9ppts of the rise in CPI inflation in August was due to base effects linked to the sharp fall in consumer prices in August 2020, most of which was driven by the Eat Out to Help Out restaurant discount scheme.’ 

Dales also expressed his view that, with inflation pressures likely to ease next year, the Monetary Policy Committee (MPC) won’t hike rates until 2023: 

‘The leap in CPI inflation from 2.0% in July to a nine-year high of 3.2% in August is the first step in a rise that may take inflation to 4.5% by November. But as inflation will fall back almost as sharply next year, we don’t think the MPC will raise interest rates until 2023.’ 

The jump in prices has also caused concern about how this will hit British households, especially with the planned cuts to Universal Credit and rise in national insurance contributions. 

These caveats seem to be limiting the Pound’s upside today, which has been trading in a narrow range with the Euro so far. 

Euro (EUR) Holds Steady on USD Weakness 

Meanwhile, the Euro is holding its ground against the Pound today, despite the UK’s inflation figures. 

The support seems to come from the single currency’s negative correlation with the US Dollar (USD), which continues to soften as markets digest yesterday’s below-expected US CPI. 

Core US inflation dropped from 4.3% to 4% year-on-year and from 0.3% to 0.1% month-on-month, which dented USD yesterday, thereby boosting support for the Euro. 

The Euro is also supported amid a slight increase in risk appetite, which persists despite concerns of an economic slowdown in China. 

China’s retail sales and industrial production for August both printed below expectations, raising concerns that the spread of the Delta variant is denting the recovery of the world’s second-biggest economy. 

Michael Hewson, Chief Market Analyst at CMC Markets UK, commented: 

‘If investors weren’t worried about a slow down in China’s economy before today’s numbers they probably are now. As a gauge of how much damage the resurgent delta variant is doing to economic activity you couldn’t see a starker example.’ 

However, investors don’t seem worried so far. Market sentiment remains risk-on, sapping demand for the safe-haven US Dollar and supporting the Euro. 

At the time of writing, the latest Eurozone industrial production figures have just been published. With production rising by 1.5% – more than double the 0.6% expected – the Euro seems to be strengthening further. 

Pound Euro Exchange Rate Forecast: GBP/EUR May Face Headwinds 

While the inflation figures could push the Pound Euro exchange rate higher today, Sterling does face some headwinds that may undermine it, as we saw yesterday

The warnings attached to the UK CPI report could add to broader concerns around the UK’s economic recovery, along with rising taxes, the supply chain crisis, and Brexit issues

In addition, the Eurozone’s better-than-expected rise in industrial production may increase EUR demand as the day progresses. 

Samuel Birnie

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