Pound Euro (GBP/EUR) Exchange Rate Stumbles as UK CPI Dents Rate Rise Expectations
(Updated 15:45, 22/6/22) The Pound Euro (GBP/EUR) exchange rate fluctuated lower today following the UK’s latest inflation figures.
While headline inflation hit a fresh 40-year high in the UK, core inflation eased by more than expected. This slightly decreased the likelihood of a 50-bps hike from the Bank of England (BoE) at its August meeting, which in turn dented the Pound (GBP).
The Euro (EUR) faced its own headwinds, causing GBP/EUR to fluctuate. The International Energy Agency (IEA) warned that Europe must be ready in case Russia cuts off all gas supplies this winter. Energy insecurity poses a perilous threat to the Eurozone economy, so this warning worried EUR investors.
However, the single currency regained its losses in the afternoon. The Euro benefitted from its negative correlation to the safe-haven US Dollar (USD), which weakened amid a slight pick-up in the European market mood and declining US Treasury yields.
In addition, some cautious optimism around the Eurozone economy helped EUR. According to researchers from the European Central Bank (ECB), the bloc’s economy will grow next year and inflation will ease, with the Eurozone avoiding stagflation.
‘Current expert forecasts remain far from a stagflation scenario,’ the ECB analysts said, despite economic uncertainty in the bloc.
This relatively upbeat assessment gave EUR a boost.
At the time of writing, the Pound Euro pair is trading around €1.1615. This is almost 0.4% lower than this morning’s opening level of €1.1659.
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Pound Sterling (GBP) Falls against Euro (EUR) following UK Inflation Report
The Pound Euro (GBP/EUR) exchange rate dropped this morning after the UK’s latest inflation readings dampened Bank of England (BoE) rate hike bets.
However, the Euro (EUR) may struggle to press the advantage amid Eurozone energy security concerns.
Pound Dips as Inflation Figures Dampen Rate Hike Bets
The Pound (GBP) slipped as today’s session began, with markets reacting to the UK inflation report for May.
Headline inflation edged up from 9% to 9.1% last month, in line with consensus estimates.
However, core inflation eased, and by more than expected. Once volatile food and energy prices were stripped out, inflation fell from 6.2% to 5.9% in May, below forecasts of 6%.
The latest results cast some doubt on whether the BoE will raise rates by 50 basis points at its next meeting. This, in turn, has dented GBP.
Economists are now revising their expectations for the bank’s tightening cycle, and views are mixed.
Paul Dales, Chief UK Economist at Capital Economics, commented:
‘It is not obvious in this release that there are signs of the “more persistent inflationary pressures” that last week the Bank said would prompt it to “act forcefully”… this release is probably not enough to seal the deal on a 50bps interest rate hike in August. Even so, we still think the Bank will raise rates from 1.25% now to 3.00% next year.’
Meanwhile, Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, expects a more dovish outcome:
‘We think that the monetary policy committee will stop hiking Bank Rate as soon as month-to-month increases in the core CPI have slowed to their long-run average rate—a point which we think will be reached in the autumn. As a result, we expect the committee to hike Bank Rate by 25bp in August and a further 25bp in September, before then leaving it on hold at 1.75% from November onwards.’
With a 50-bps rate hike in August now looking slightly less likely, Pound Sterling has stumbled.
Euro Capped by Energy Security Fears
Meanwhile, the Euro gained ground this morning, despite some headwinds.
Energy security in Europe continues to worry investors. Yesterday, Denmark and Sweden both declared an ‘early warning’ over Russian gas supplies. Russia has so far stopped or reduced gas exports to 11 EU countries, with analysts saying it is trying to leverage its position as Europe’s main fossil fuel supplier to inflict economic damage on the EU in retaliation for Western sanctions.
This is contributing to surging energy prices in the Eurozone, which pose a serious threat to the bloc’s economy.
The International Energy Agency (IEA) has warned that Europe must prepare for a complete halt in Russian gas supplies this winter.
In an interview with the Financial Times, Faith Birol, Executive Director of the IEA, said:
‘Europe should be ready in case Russian gas is completely cut off…
‘The nearer we are coming to winter, the more we understand Russia’s intentions… I believe the cuts are geared towards avoiding Europe filling storage, and increasing Russia’s leverage in the winter months.’
These concerns are limiting the Euro’s gains against Pound Sterling this morning.
Pound Euro Exchange Rate Forecast: GBP/EUR to Waver?
After hitting a six-day low, GBP/EUR seems to have bounced. Whether it can sustain this rebound remains to be seen.
Aside from reduced rate hike bets, Sterling could face other headwinds today. The UK currently seems very unstable, economically and politically. Workers across the country are considering strike action as pay fails to keep up with inflation, recession risks are rising, and Boris Johnson’s grip on power remains tenuous.
However, the single currency has challenges of its own. Worsening news from Russia could push EUR lower, while a souring market mood and strengthening US Dollar (USD) could also hurt the Euro.
As a result, we may see the Pound Euro pair waver, with both currencies struggling to hold significant gains.