GBP/EUR Exchange Rate Weakens on Euro Tailwinds
(Updated 16:28, 29/06/2022) The Pound Euro (GBP/EUR) exchange rate trended lower through the course of today’s session as German CPI-inspired headwinds were dissipated by encouraging remarks from the European Central Bank (ECB)’s Christine Lagarde.
Pan-German inflation printed lower than expected this afternoon, as predicted by earlier German state data. This led to fears that Euro area inflation for the month of June would also miss expectations, perhaps inciting the ECB to rein in its recent, more-aggressive policy stance.
However, participating in today’s final panel at the Sintra Forum, Lagarde said she felt the Eurozone was unlikely to go back to an environment of low inflation. Expectations were much higher than before, she said: economists predict that price growth will persist until early Autumn.
In comparison, the Bank of England (BoE)’s Andrew Bailey maintained a dovish tone, suggesting the UK’s central bank will stick with a more gradual approach when hiking interest rates. Swati Dhingra, who will replace known hawk Michael Saunders on the BoE’s monetary policy committee in August, also advised caution.
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Pound Euro Exchange Rate Climbs on German CPI Prospects
The Pound Euro (GBP/EUR) exchange rate is firming this morning as inflation figures for the German state of North Rhine-Westphalia fell to 7.5% from 8.1% in May, year-on-year. This has dented German bund yields, pressuring the Euro along with forecasts for weakening economic sentiment across the bloc.
At the time of writing, GBP/EUR is trading at €1.1599, up slightly from today’s opening levels.
Euro (EUR) Subdued as Investors Brace for Weak Data
The Euro (EUR) is trending down against the majority of its peers today despite relatively bearish trading conditions, as bund yields drop and German inflation looks set to fall.
Today’s state inflation data from North Rhine-Westphalia missed expectations and fell by 0.6% in June, on an annualised basis; this suggests that pan-German data will reflect decreasing price pressures, easing pressure on the European Central Bank (ECB) to tighten monetary policy.
Amidst a hawkish spate of ECB rhetoric in which the bank’s President Christine Lagarde confirmed that the bank would ‘go as far as necessary’ to ensure that inflation stabilises at 2% over the medium term, weakening inflation could cause the ECB to reconsider its more aggressive policy stance.
This would likely be Euro-negative, signifying a return to policy divergence between the typically-dovish ECB and more hawkish Federal Reserve.
Elsewhere, the Euro area’s economic sentiment index will print later today and is expected to have fallen on last month. General confidence remains under threat from recessionary worries and the ongoing war in Ukraine.
Pound (GBP) Strengthens Ahead of BOE Speech
The Pound (GBP) is climbing this morning, despite a lack of significant UK data so far. Recessionary concerns also cap gains for the currency alongside cost-of-living pressures, as UK shop prices hit their highest rate of inflation since 2008.
A fairly cautious market mood may be lending support to Sterling against some of its perceived-riskier peers, alongside hopes for a hawkish speech from Bank of England (BoE) Governor Andrew Bailey this afternoon.
The central bank head will speak alongside Christine Lagarde and Fed Chairman Jerome Powell at the last day of the Sintra Forum in Portugal; the theme of the afternoon is ‘Global value chains, supply bottlenecks and international trade.’
Yesterday’s speech from the BoE’s Jon Cunliffe appeared to have little effect on GBP trading; overall, the Bank of England has struck a fairly dovish tone in recent days, preferring a gradual approach to the more aggressive tightening policy favoured by the Fed.
Nevertheless, money markets are now fully pricing a 25bps rate hike for August and give a 78% chance of a 50bps move, as ING strategists remark:
‘With inflation staying near the highs, we doubt Governor Bailey will want to push back too much against tightening expectations today.’
Pound Euro Exchange Rate Forecast: Sintra Forum Address to Determine Trading?
Looking ahead, today’s closing speech at the Sintra Forum – involving Lagarde, Bailey and Chairman Powell – may have some significant impact on the Pound Euro exchange rate.
If all three central bank leaders concur on the challenges posed by inflation and the action necessary to address such challenges, both Sterling and the Euro may gain – however, a divergence in opinion could inspire bearish trading.
Elsewhere, economic sentiment in the Eurozone will likely influence EUR exchange rates to some degree, potentially applying downside pressure if the release prints as expected.