Pound Euro (GBP/EUR) Falls Further from Two-Week High following UK CPI
(Updated 14:15, 17/8/22) The Pound Euro (GBP/EUR) exchange rate continued to fall from a near two-week high hit earlier this morning as recession fears weighed on Pound Sterling (GBP).
GBP/EUR initially spiked following today’s higher-than-forecast UK inflation reading as markets priced in further aggressive rate rises from the Bank of England (BoE).
However, with the UK facing a worsening cost-of-living crisis and a looming recession, the prospect of runaway inflation and higher interest rates seems to have spooked GBP investors.
In addition, a sell-off in UK government bonds triggered the country’s biggest bond market inversion since the 2008 financial crash. Yield curve inversions are considered an economic warning sign, and this certainly would have troubled markets.
Meanwhile, the Euro (EUR) enjoyed some relatively upbeat economic data from the Eurozone.
Although both the employment change preliminary and the second estimate for GDP growth both printed 0.1 percentage points below forecast, both still showed fairly strong results in the second quarter of this year.
Ricardo Amaro, Senior Economist at Oxford Economics, commented on the figures:
‘This is still a solid outturn which leaves the GDP figures painting a flattering picture of growth dynamics in H1 2022…
‘The labour market also recorded healthy improvement in Q2. Eurozone employment rose by 0.3% q/q, underpinning a further drop in the unemployment rate to an all-time low of 6.6% in Q2.’
This seems to have given the single currency a boost, although most economists believe the Eurozone will struggle through the second half of the year.
At the time of writing, the Pound Euro exchange rate is trading at €1.1872. This is almost 0.35% down from the two-week high of €1.1913 hit earlier in today’s session.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Retreats as Cost-of-Living Fears Undermine Rate Rise Bets
The Pound Euro (GBP/EUR) exchange rate spiked to a near two-week high this morning following the UK’s latest inflation rate reading, but Sterling then turned south.
At the time of writing, GBP/EUR is trading at €1.1897, down from today’s high of €1.1913.
Pound (GBP) Fails to Sustain Post-Inflation Gains
After rising steadily higher since yesterday morning, the Pound briefly touched a near two-week high against the Euro (EUR) this morning as the UK’s latest inflation rate reading exceeded forecasts.
Annual inflation in the UK jumped from 9.4% in June to 10.1% in July, much higher than market expectations of 9.8%.
This hot reading has locked in expectations of another 50-bp rate rise from the Bank of England (BoE) at its meeting next month. Markets expect the bank to act forcefully to tame inflation and salvage its credibility. In turn, the prospect of higher interest rates lifted Sterling.
However, with inflation hitting double digits and interest rates set to rise further, the UK faces a devastating cost-of-living crisis and a looming recession.
Debapratim De, Senior Economist at Deloitte, commented:
‘As the Bank moves aggressively to crush double-digit inflation, we are forecasting a 1.6% contraction in activity between this autumn and the next. This is a much smaller contraction than the pandemic but, with a sharp squeeze on consumer spending power and likely rise in unemployment, will feel significantly disruptive.’
These worries may hold Sterling back today.
Euro (EUR) Recoups Losses despite Below-Forecast Data
Meanwhile, the Euro put up a resistance against the Pound this morning as EUR investors held out hope for some upbeat economic data.
Ahead of the second-quarter GDP growth rate (second estimate) and employment change (preliminary reading), the Euro managed to rise against its other peers and claw back losses against Sterling.
However, both GDP growth and employment printed 0.1 percentage points below expectations.
Despite this, the single currency has still managed to regain earlier losses against the Pound, although any further upside may be limited.
Pound Euro Exchange Rate Forecast: GBP/EUR to Waver as Markets Digest UK CPI
As the day unfolds, we may see GBP/EUR wavering in a narrow range as markets digest the latest data releases. While BoE rate hike bets could underpin the Pound, recession and stagflation fears may put pressure on the UK currency.
GBP investors may also take their cues from the domestic political response to surging UK inflation. Tory leadership candidates Liz Truss and Rishi Sunak are under pressure to pledge more support for citizens struggling with the sharp fall in living standards. They also face the difficult task of navigating the UK economy through a period of high inflation, slowing growth and an expected rise in unemployment.
Any new announcements or indications that the government will offer significantly more fiscal support could help alleviate fears and thereby lift the Pound. But if markets judge the political response to be lacking, GBP could fall.
As for the Euro, it could be affected by its negative correlation to the US Dollar (USD). American data later today, including retail sales and the meeting minutes from the Federal Open Market Committee (FOMC), could prompt movement in EUR.