Pound Euro (GBP/EUR) Exchange Rate Recovers as UK CPI Fuels Rate Rise Expectations
(Updated 15:00, 16/2/22) The Pound Euro (GBP/EUR) exchange rate has rebounded from this morning’s dip as markets price in more aggressive action from the Bank of England (BoE).
UK inflation printed at 5.5% in January, unexpectedly edging up by 0.1 percentage points. Despite this, the Pound (GBP) initially slipped against a strengthening Euro (EUR), perhaps weighed down by worries around the UK’s cost-of-living crisis.
However, Sterling has now rallied. Following the hot CPI print, and with oil and gas prices rising amid the Russia-Ukraine crisis, economists think the BoE may take an increasingly hawkish approach to policy.
Dan Boardman-Weston, CIO at BRI Wealth Management, said that further rate rises seemed ‘inevitable’. Meanwhile, Paul Dales, Chief UK Economist at Capital Economics, said:
‘The rise in CPI inflation in January from 5.4% to a new 30-year high of 5.5%, the latest rise in oil prices and the new item weights mean that we now think CPI inflation will rise to a peak of 7.9% in April (up from our previous forecast of 7.6%).
‘This will add more pressure on the Bank of England to raise interest rates rapidly. We think rates will rise from 0.50% now to 1.25% this year and to 2.00% next year.’
The rebound in the Pound Euro pair was also helped by a weakening Euro. EUR investors were initially optimistic when Russia said it was withdrawing troops. But reports suggest Russia is actually fortifying its ranks on the Ukrainian border.
Nato Secretary General Jens Stoltenberg said:
‘We have not seen any withdrawal of Russian forces. And of course, that contradicts the message of diplomatic efforts. What we see is that they have increased the number of troops and more troops are on their way. So, so far, no de-escalation.’
In addition, strong US retail sales have boosted the US Dollar (USD). EUR has a negative correlation with USD, so this is also weighing on the single currency.
GBP/EUR is currently trading just shy of €1.195, up 0.35% from today’s lows.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Falters amid UK Inflation and Russia-Ukraine Crisis
The Pound Euro (GBP/EUR) exchange rate has fluctuated this morning, heading lower overall, as EUR investors remain optimistic about a de-escalation of the Russia-Ukraine crisis.
Meanwhile, a hotter-than-expected CPI has caused Sterling to wobble amid fears around the UK’s cost-of-living crisis.
Pound (GBP) Dips despite Higher CPI
The Pound (GBP) slipped this morning, despite the UK’s latest CPI coming in higher than expected.
Forecasters thought UK inflation would hold steady in January at 5.4%. Instead, the CPI edged higher to 5.5%, the highest reading since March 1992. This adds further pressure on the Bank of England (BoE) to raise interest rates for the third consecutive time next month.
This would usually boost the Pound. However, investors are increasingly concerned about the UK’s cost-of-living crunch. Yesterday’s jobs data showed that wage growth is lagging behind inflation at a time when households are facing soaring prices, higher taxes and interest rate rises.
These pressures could significantly slow the UK’s economic recovery.
In addition, markets seem focused on the Russia-Ukraine crisis today. Therefore, the CPI reading may be less impactful than it otherwise would be.
Euro (EUR) Wavers Higher amid Russia-Ukraine Crisis
Meanwhile, the Euro (EUR) ticked higher as the European session opened this morning. Fears of a Russian invasion of Ukraine initially eased as both the West and Russia seek a diplomatic solution.
Yesterday, Vladimir Putin said that he was withdrawing some Russian troops from the border and wanted to remain in dialogue with his Nato counterparts.
Additionally, Russia’s ambassador to the EU, Vladimir Chizhov, said that there would not be an attack on Ukraine in the coming month, and the Russian military announced that some of its soldiers were leaving Crimea.
However, those in the West are sceptical. Many of the withdrawn troops will be stationed in bases close to Ukraine’s border, and some fear that reports of a pullback are disingenuous.
Nato Secretary General Jens Stoltenberg said:
‘So far we have not seen any de-escalation on the ground. On the contrary, it appears that Russia continues the military build-up and we have not received a response to a written document or written proposals that we sent to Russia on the 26 January outlining the topics and items where Nato allies are ready to sit down and discuss with Russia to try to find a political path forward.’
While an imminent invasion looks unlikely, tensions remain fraught. As a result, EUR has wavered higher against GBP.
Pound Euro Exchange Rate Forecast: Russia-Ukraine Crisis in Focus
Looking ahead, the Russia-Ukraine crisis could continue to occupy investors’ minds.
Despite the apparent de-escalation, Russia has also warned that it would retaliate if Britain imposed new sanctions on Moscow. Additionally, Ukraine suffered a cyberattack on military forces and two banks last night, with analysts pointing the finger at Russia.
If tensions flare up again, the Euro could find itself under pressure.
As for the Pound, if the high CPI print further fuels rate hike speculation, Sterling could regain some ground.