Pound Euro Exchange Rate Firms as EU CPI Exceeds Forecasts
(Updated 16:55, 02/03/2022) The Pound Euro (GBP/EUR) exchange rate continued climbing through Wednesday’s session despite Euro area inflation exceeding expectations. The CPI rose to 5.8% – above expectations of a 5.4% reading – as higher energy costs undermined initial forecasts.
Today’s higher-than-expected inflation puts the European Central Bank (ECB) in a difficult position, considering the situation in Ukraine and policymakers’ dovish instincts: central bank officials must now convey a sense of calm amid war-related market turmoil, while also responding to mounting price pressures.
ECB Chief Economist Philip Lane commented today that the ECB stands ready to take whatever action is needed to ensure price and financial stability in the euro area, reassuring investors that:
‘Today’s Eurostat inflation release will be incorporated in the projections that will be considered at next week’s monetary policy meeting.’
Meanwhile, Russian negotiators say the option of a ceasefire will be discussed in talks with Ukraine, lending some upside – although in other news, Ukraine’s ambassador to the UN compared the Russian leader Vladimir Putin with Hitler.
Sergiy Kyslytsya postured that the Russian invasion of Ukraine is intended ‘to deprive Ukraine of the very right to exist’, adding:
‘More than 80 years ago, another dictator tried to finally resolve the issue of another people. He failed when the world responded in a resolute and united manner.’
Original article continues below:
GBP/EUR Exchange Rate Climbs as Fighting in Ukraine Intensifies
The Pound Euro (GBP/EUR) exchange rate has jumped this morning as low risk sentiment subdues support for the Euro especially, on account of its strong negative correlation with the risk-off US Dollar (USD).
At the time of writing, GBP/EUR is trading at €1.2005, up 0.2% from today’s opening levels.
Pound (GBP) Sinks Overall on Low Risk Sentiment
The Pound (GBP) is falling against the majority of its peers this morning as a lack of significant UK data exposes Sterling to external, risk-off factors.
Worries about the impact of aggressive sanctions against Russia and further attacks on Ukrainian cities continue to weigh upon trading sentiment, inspiring a fresh leg down in the equity markets; more fighting is expected in the days ahead, as a large Russian convoy approaches Ukraine’s capital.
A week after launching its invasion of Ukraine, Russia has claimed to have taken control of its first sizeable Ukrainian city: Kherson, in the south. Strategically located on the Dniepr river, the provincial capital would be the biggest city to fall so far.
British Defence Minister Ben Wallace struck a downbeat note in an interview with LBC Radio:
‘Anyone who thinks logically would not do what he (Putin) is doing, so we are going to see … his brutality increase. He doesn’t get his way, he surrounds cities, he ruthlessly bombards them at night … and he will then eventually try and break them and move into the cities.’
The UK has announced further sanctions today, against Belarus – specifically targeting senior military figures for their role in joining and facilitating the Russian invasion. So far, the impact of sanctions has been to inspire volatility in the currency markets as investors worry that Russia may retaliate by cutting off energy supplies to Europe.
Euro (EUR) Weakens on US Dollar Strength, Risk-Off Mood
The Euro (EUR) has slumped so far today as risk-off trading buoys the US Dollar, consequently subduing the Euro.
Single currency investors are looking ahead to the publication of the Euro area inflation rate for fresh trading impetus, hoping that an increase in the annualised CPI may encourage the European Central Bank (ECB) to adopt a more hawkish position on monetary policy tightening.
Goldman Sachs recently updated their inflation expectations for the Eurozone, speculating that soaring energy prices stemming from the Ukraine conflict will likely push the CPI to a new peak in May, of 6.5%.
However, analysts note that although quickening inflation would raise pressure on the ECB, its negative effects on consumption suggest policymakers may be more patient:
‘The associated risks to activity and potential knock-on effects into the fiscal outlook (especially in Italy) suggest that more patience might be required with the policy normalization.’
Elsewhere, Germany’s unemployment rate lowered from 5.1% to 5% in February, lending limited support to the Euro. Unemployment shrank by 33K persons to 2.312 million: a new pandemic low.
Pound Euro Exchange Rate Forecast: Russian Movement, EU Inflation to Direct Movement?
Looking ahead, events in Ukraine are likely to remain the most significant driver of currency movements, inspiring volatility on account of the far-reaching economic fallout.
Meanwhile, if inflation in the Euro area increased in February according to flash data, the Pound Euro exchange rate is likely to sink; however, if ECB policymakers strike a dovish tone, GBP/EUR losses may be capped.