Pound Euro Exchange Rate Buoyed by Stronger-than-Expected UK CPI Reading
The Pound Euro (GBP/EUR) exchange rate is ticking higher this morning as markets react to the release of a stronger-than-expected UK inflation reading.
At the time of writing the Pound Euro exchange rate is trading at around €1.1781, up roughly 0.2% from this morning’s opening levels.
Pound (GBP) Firms, but Surge in Inflation is Unlikely to Result in December Rate Hike
The Pound (GBP) is underpinned by the release of the UK’s consumer price index this morning, after reporting inflation surged to a new decade high last month.
According to data published by the Office for National Statistics, domestic inflation surged from 4.2% to 5.1% in November, sailing past forecasts for a more modest rise to 4.7%.
Commenting on the Inflation figures the ONS said:
‘The upward contribution was spread across most of the detailed classes, with the largest effects coming from a broad range of women’s and men’s clothing.’
Just a couple of weeks ago, such a rapid surge in inflation would have made a December rate hike from the Bank of England (BoE) seem like a dead-cert.
However, with the emergence of the Omicron Covid variant, and with the UK now facing stricter restrictions most analysts agree that the BoE will prefer to hold pat until it knows more about the impact of Omicron.
Euro (EUR) Paralyzed ahead of Central Bank Decisions
At the same time, the Euro (EUR) is struggling to find any momentum this morning as EUR investors are reluctant to place any aggressive bets ahead of the European Central Bank’s (ECB) and Federal Reserve’s latest interest rate decisions.
Reports suggest that the ECB might announce it will temporarily boost its bond purchases by €40bn-€60bn from March, a move which is likely to weigh heavily on EUR exchange rates.
Meanwhile, due to the strong negative correlation between the Euro and the US Dollar (USD), the Fed’s decision later this evening is also set to act as a key risk event. If USD exchange rates surge on the back of a more aggressive tapering announcement, then the single currency is likely to weaken.
Pound Euro Exchange Rate Forecast: ECB and BoE Rate Decisions in the Spotlight
Looking ahead to the second half of the week, acting as the main catalyst of movement in the Pound Euro (GBP/EUR) exchange rate, will undoubtedly be the ECB’s and BoE final rate decisions of the year.
If the ECB moves to temporarily extend its asset purchases as expected, then we are likely to see the Euro face some notable headwinds through the session.
Further pressure may also come from the release of the Eurozone’s latest PMI figures tomorrow morning as these are expected to report a slowing of economic activity in the bloc this month.
Meanwhile, with the BoE no longer expected to hike interest rates this month, the focus for GBP investors will be on the bank’s forward guidance for 2022.
While the BoE may adopt a more cautious tone in light of the UK’s new restrictions, this week’s strong employment and inflation releases could give the bank the confidence to signal a rate hike could come in early 2022, boosting the Pound in the process.