Pound Euro (GBP/EUR) Exchange Rate Firms on UK CPI and Covid Optimism
(Updated 14:45, 19/1/22) The Pound Euro (GBP/EUR) exchange rate has hit a fresh 23-month high today after a brief dip earlier this morning.
The upside in the Pound (GBP) comes as the UK’s latest inflation rate reading beat forecasts, rising to a near 30-year high of 5.4%. As a result, economists and markets expect the Bank of England (BoE) to raise its Bank Rate again next month, with more rate hikes to follow.
Adding to Sterling’s upside against the Euro (EUR) is Covid optimism in the UK. Prime Minister Boris Johnson has announced that Plan B Covid restrictions will end next week. UK Covid cases have fallen significantly this month and, despite a slight uptick over the past few days, daily infections remain at a one-month low.
GBP/EUR is currently trading at €1.202, up 0.25% from today’s low of €1.199.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Eases off Highs as Markets Digest CPIs
The Pound Euro (GBP/EUR) exchange rate hit a fresh 23-month high this morning but slipped as the European session opened, despite a hotter-than-expected UK CPI.
Meanwhile, the Euro (EUR) seems fairly quiet so far as German inflation printed as expected.
Pound (GBP) Retreats Slightly despite Strong CPI
After surging higher against the Euro yesterday evening, the Pound (GBP) has shed some of those gains this morning.
Overnight, it seems as though investors flocked to the Pound in the hopes of a higher-than-expected inflation rate reading before reaching overbought conditions. At the time of writing, the hot CPI release has not yet boosted GBP/EUR.
UK inflation jumped to a near 30-year high of 5.4% in December, overshooting forecasts of 5.2%.
The reading increases the likelihood that the Bank of England (BoE) will raise interest rates again at its meeting in two weeks’ time, which should be supporting the Pound. However, it looks as though a rate rise is already priced into the Pound Euro pair, which is limiting gains.
In addition, intensifying price pressures add to the looming cost-of-living crisis facing the UK. Yesterday’s jobs data showed that real wages fell in November as inflation outpaced wage growth. The BoE expects inflation to keep climbing until spring, with rate hikes taking 12-18 months to fully affect the economy. And households face tax rises in April.
Hannah Audino, an economist at PwC UK, says that ‘high inflation is one of the biggest risks to the UK’s economic recovery this year.’
These concerns may be capping GBP’s upside today.
Euro (EUR) Muted following German Data
Meanwhile, the Euro managed to rebound from its 23-month low this morning but is now trading sideways. The rebound looks like a technical resistance as EUR investors pushed back against the Pound.
Earlier this morning, Germany’s final harmonised inflation rate printed as forecast at 5.7% – down from 6% in the previous month. This as-expected data has likely added to EUR’s limited movement.
Markets expect the European Central Bank (ECB) to maintain its dovish approach to monetary policy throughout this year, putting it at odds with the BoE and the Federal Reserve. This is keeping EUR subdued. Although GBP/EUR slipped this morning, it remains strong.
Pound Euro Exchange Rate Forecast: More Movement as Markets Digest CPI?
We could see more movement as markets digest the UK CPI and economists present their analyses. If the consensus is that the BoE will hike harder and faster than traders had expected then we could see the Pound gaining ground.
BoE Governor Andrew Bailey will deliver a speech later this afternoon. Investors will pay close attention in an attempt to gauge what the central bank’s response could be. However, Bailey and his colleagues have been criticised for poor communication ahead of the last two policy meetings, where markets were wrong-footed twice in a row.
Sterling has been fairly volatile recently, with multiple factors affecting the Pound. Political uncertainty around the ‘partygate’ scandal, Brexit concerns and the looming cost-of-living crisis are pulling GBP down, while falling Covid cases and a likely BoE rate hike are pushing it back up. All of these factors could come into play today, adding some more uncertainty into the mix.
As for the Euro, there is little economic data of note coming out of the Eurozone today. Therefore, movement in the single currency could be fairly limited.