Pound Euro (GBP/EUR) Exchange Rate Rebounds as GBP Investors Shrug Off CPI Miss

Pound Euro (GBP/EUR) Exchange Rate Recovers from Dip in Inflation

(Updated 16:40, 20/10/21) The Pound Euro (GBP/EUR) exchange rate rebounded strongly this afternoon, as GBP bulls shook off the slight dip in UK inflation.

The UK’s CPI for September printed at 3.1%, though economists expected it to hold at a nine-year high of 3.2%. With inflation easing slightly, a November rate hike from the Bank of England (BoE) became less likely, thereby denting GBP.

After falling through the morning, Sterling bounced back in the afternoon, regaining the upside against the Euro (EUR). It seems that the initial fall in GBP/EUR was somewhat of a knee-jerk reaction, with the Pound (GBP) recovering amid a market correction.

Sterling has strengthened against the Euro in recent days, hitting a 20-month high, as markets brace for a rate hike before the end of 2021. With the European Central Bank (ECB) looking a long way off tightening monetary policy, the Pound Euro exchange rate could climb even higher in the coming weeks.

At the time of writing, the Pound Euro pair is trading at €1.1862, 0.17% higher than this morning’s opening rate of €1.1842.

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Pound Euro (GBP/EUR) Exchange Rate Falls as UK CPI Miss Dents Rate Hike Expectations

(Updated 12:30, 20/10/21) The Pound Euro (GBP/EUR) exchange rate has fallen today, after the UK’s CPI reading printed below expectations for September, decreasing the likelihood of a Bank of England (BoE) rate hike next month.

The UK’s inflation rate was expected to hold at 3.2%, with some investors hoping it would overshoot, but instead eased to 3.1%.

As such, the chances of the BoE raising interest rates at its November monetary policy meeting have slimmed. According to data from CME, the probability of a rate hike next month has dropped from 59% yesterday to 32% today. With a hike looking less likely, the Pound has softened against the Euro.

However, Sterling’s losses may be limited. The probability of a rate rise in December remains virtually unchanged at 70%, suggesting the current movement is a correction. This leaves room for the Pound Euro exchange rate to continue climbing in the medium-term.

The pair is currently trading at €1.1827, down 0.13% from €1.1842 at the start of today’s European session.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Holds Strong on BoE and ECB Policy Approaches

The Pound Euro (GBP/EUR) exchange rate has ticked slightly higher this morning as GBP investors shrug off a modest dip in UK inflation. The diverging approaches from the respective central banks still underpin the Pound Euro pair.

At the time of writing, GBP/EUR is trading at €1.1854, up 0.1% from this morning’s opening level of €1.1842.

Pound (GBP) Ticks Higher despite Inflation Easing

The Pound (GBP) is managing to edge higher against the Euro (EUR) this morning, despite the UK’s CPI printing just below expectations.

Economists expected the UK inflation rate to hold at a nine-year high of 3.2% but instead it eased down to 3.1%.

Many analysts have pointed out that this is likely to be a temporary dip, caused primarily by the fact that some distorting effects from last year are no longer a factor. Hussain Medhi, a macro and investment strategist at HSBC Asset Management, explains:

‘Inflation stabilised in September, as policy-related distortions such as last year’s ‘Eat Out to Help Out’ scheme dropped out of the calculation.

‘Nevertheless, energy price effects and ongoing supply-chain disruptions could see inflation peak comfortably above 4% early next year.’

Although today’s results are likely to be a temporary respite from rising inflation, some GBP investors will be mildly disappointed by the result. Speculation that the Bank of England (BoE) is close to hiking rates has intensified in recent weeks, and if inflation had overshot then the likelihood of a hike would have increased.

Nevertheless, the Pound Euro exchange rate is firming today as GBP investors shake off the CPI results.

The BoE is still taking a far more hawkish stance than the European Central Bank (ECB), which continues to favour Sterling over the single currency.

Euro (EUR) Remains Subdued on Dovish ECB

Meanwhile, the Euro remains muted ahead of the Eurozone’s final inflation rate reading for September.

The finalised CPI confirmed that Eurozone inflation rose from 3% to 3.4% last month. However, with the ECB maintaining its dovish stance, such a jump in inflation is unlikely to support the single currency.

Yesterday, ECB Governing Council Member Olli Rehn argued that inflation in the Euro area is ‘still mostly transitory’. Rehn said:

‘The counter evidence speaking for the transitory interpretation is quite convincing. When looking at the longer-term expectations, there is no upward trend… core inflation in the euro area is still subdued.’

Today, another ECB official – Francois Villeroy – echoed these comments, saying that the central bank can afford to be patient.

The comments suggest that the ECB is happy to wait and watch what happens rather than act to curb inflationary pressures, while the BoE has signalled that it will tighten policy in the near future.

With an ECB hike seemingly a long way off, and many analysts expecting a BoE hike to come this year, the Pound continues to outperform the Euro.

GBP/EUR Exchange Rate Forecast: Movement May Be Limited Today

As the day goes on, movement in the Pound Euro exchange rate may be rather limited, as a notable lack of impactful data could leave both currencies without a clear direction.

GBP and EUR investors will be keeping an eye on domestic headlines. Any economic or energy-related news from the UK or the Eurozone could impact the respective currencies.

Samuel Birnie

Contact Samuel Birnie