Pound Euro Exchange Rate Bounces Back as Sterling Recovers Some Losses
(Updated 16:10, 18/05/2022) The Pound Euro (GBP/EUR) exchange rate rebounded today following the publication of the Euro area’s CPI report. European inflation printed marginally lower than earlier estimates forecast, but remained well above the European Central Bank (ECB)’s target of 2%.
In response, investors turned bearish on concerns that the Eurozone will be unable to keep up with the Federal Reserve in fighting soaring inflation and avoiding a recession scenario.
ECB rhetoric has been mixed recently, leaving traders uncertain of the bank’s next moves.
Policymaker Olli Rehn’s upbeat comments were followed today by a more measured speech from Pablo Hernandez de Cos, who remarked that the process of raising interest rates should be gradual and any shifts in mid-term inflation expectations require monitoring.
Meanwhile, the Pound (GBP) may have enjoyed a boost from the assumption that April’s high CPI is the consequence of an increase to the energy price cap . If this is the case, investors may assess that inflation peaked in April.
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GBP/EUR Exchange Rate Reverses Gains as UK Cost-of-Living-Crisis Intensifies
The Pound Euro (GBP/EUR) exchange rate is declining this morning as UK inflation printed at 9% – marginally below expectations but still 2% up on last month and the highest level seen since 1982. Euro area inflation is expected to have reached 7.5% in April, as today’s finalised data will confirm or deny.
At the time of writing, GBP/EUR is trading at €1.1796, down 0.3% from today’s opening levels.
Pound (GBP) Sinks as High Inflation Hurts UK’s Poorest
The Pound (GBP) has slumped against its peers so far today, as surging UK inflation threatens to push the UK’s poorest families further into poverty.
While a high consumer price index ordinarily precedes policy tightening measures from the central bank, bolstering morale, the Bank of England (BoE) has already warned that it will take a measured approach to hiking interest rates, in light of weaker-than-expected economic growth. The UK’s GDP printed at 0.8% last quarter, rather than the 1% expected.
The Resolution Foundation is now urging the government to help those on the lowest incomes, having calculated that they are now suffering double-digit inflation, while richer households are less badly hit.
This is illustrated by the disproportionate price rises across household essentials, including water, gas, electricity and food.
Meanwhile, Unite general secretary Sharon Graham has hit back at BoE Governor Andrew Bailey’s suggestion that firms show restraint when raising wages, which businesses have argued forces them to put up prices.
‘If Andrew Bailey wants to lecture anyone about belt-tightening, he should direct his attention to the CEOs of the UK’s top 100 companies,’ said Graham; ‘[they] have seen their wages swell by an average of 34 per cent to an astonishing £4.1 million a year. Ask them to pause to reflect about the scale of their corporate greed.’
Euro (EUR) Wavers Ahead of Euro Area Inflation
The Euro (EUR) has succumbed to some downside against its peers this morning, as investors are reluctant to place bullish bets ahead of the release of the Euro area CPI.
While the release is expected to be less alarming than the UK’s, if EU inflation prints as expected it will still be well above the European Central Bank (ECB)’s 2% target rate.
Commentary from Europe’s central bank has been uncharacteristically hawkish recently, lending some support to the single currency – policymaker Olli Rehn remarked earlier today that it is necessary for interest rates to move relatively quickly out of the negative territory, in contrast with the BoE’s reluctant stance.
Nevertheless, EUR is struggling to retain yesterday’s gains. Also dampening support for the currency is a surge in US Dollar (USD) strength following an upbeat speech from Federal Reserve Chairman Jerome Powell last night.
Due to the strong negative correlation between the Euro and the ‘Greenback’, US Dollar strength often subdues EUR sentiment.
Pound Euro Exchange Rate Forecast: EU Inflation to Decide Further Movement?
If Euro area inflation prints at or below expectations, the Pound Euro exchange rate could fall further on EUR upside. However, economic volatility across the bloc is unlikely to fade, given the impact of Russia’s war in Ukraine upon Europe.
Meanwhile, a lack of further data leaves GBP/EUR to trade on external headwinds. As markets digest the latest data, the exchange rate may be confined to a narrow range.