Pound Euro Exchange Rate Hits One-Week High following UK Inflation

Pound Euro (GBP/EUR) Exchange Rate Extends Upside following UK CPI Reading

(Updated 16:15, 14/9/22) The Pound Euro (GBP/EUR) exchange rate strengthened today, hitting a one-week high, as the UK’s latest CPI reading cheered GBP investors.

At the time of writing, GBP/EUR is trading at €1.1583, up 0.5% from this morning’s opening level of €1.1526.

UK headline inflation unexpectedly eased, providing some relief to households amid the country’s cost-of-living crisis. However, core inflation marched higher, so markets still expect the Bank of England (BoE) to press ahead with interest rate rises. Both these factors seemed to have given the Pound (GBP) a boost.

Meanwhile, the Euro (EUR) faced some challenges today.

Data released this morning showed Eurozone industrial production contracted far more than forecast in July, printing at -2.3% rather than -1%.

This was followed by some dovish comments from European Central Bank (ECB) Chief Economist Philip Lane. Following the ECB’s jumbo 75-bp rate rise last week, Lane suggested that future rate hikes would be smaller. Lane said:

‘We expect that this transition will require us to continue to raise interest rates over the next several meetings… The appropriate size of an individual increment will be larger, the wider the gap to the terminal rate and the more skewed the risks to the inflation target.’

This means that unless the terminal rate – the ECB’s target interest rate – moves higher, further rate hikes could be smaller than 75 basis points.

These comments dented the single currency, helping the Pound Euro exchange rate rise to a one-week high.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Boosted by BoE Rate Hike Bets

The Pound Euro (GBP/EUR) exchange rate strengthened on Wednesday morning after the latest UK inflation rate reading supported expectations of more Bank of England (BoE) interest rate rises.

At the time of writing, GBP/EUR is trading at €1.1552, up around 0.2% from today’s opening level of €1.1526.

Pound (GBP) Climbs as Core Inflation Rises

The latest UK CPI supported the Pound (GBP) this morning, despite an unexpected drop in headline inflation, amid signs that price pressures are broadening. This in turn is maintaining pressure on the BoE Monetary Policy Committee (MPC) to continue raising interest rates.

In August, headline inflation eased from 10.1% to 9.9%, rather than rising to 10.2% as markets had anticipated.

However, core inflation – which strips out energy costs and other volatile items – increased as expected, rising from 6.2% to 6.3%.

The cooler headline reading came thanks to falling fuel prices. The surging costs of gas and oil following Russia’s invasion of Ukraine have been a key driver of decades-high inflation rates around the world.

However, UK inflation seems to be broadening into other goods and services, hence the rise in the core CPI despite lower petrol prices.

Looking at the figures, the MPC is likely to continue on its current path of tightening monetary policy by raising interest rates.

Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, offered this pithy summary:

‘In one line: Sustaining, rather than increasing, the pressure on the monetary policy committee (MPC) to act.’

However, there are also signs that core goods inflation is easing off. This is perhaps due to improving supply chains and higher retailer inventories. As a result, some economists believe that the BoE won’t need to move as high as markets anticipate. Therefore, Sterling’s uplift has been modest, and the Pound Euro exchange rate may find its gains limited.

Euro (EUR) Subdued despite Energy Crisis Optimism

Meanwhile, the Euro (EUR) initially attracted some tentative support today as investors remain cautiously optimistic that a solution to Europe’s energy crisis is within reach.

Ukraine’s recent victories on the battlefield have raised hopes that the country can expel Russia’s invading army, ending the war sooner than many had expected. Such a result could also bring about an end to Europe’s energy crisis, which has been caused primarily by the war.

But many analysts warn that it is too early to tell whether Ukraine’s successful counteroffensive marks a turning point. Therefore, investor optimism is limited.

Meanwhile, the European Commission (EC) has proposed new emergency measures to tackle the energy crisis.

In her state of the union speech, EC President Ursula von der Leyen advocated plans to raise more than €140bn for member states to weather soaring costs. Part of this funding will be drawn from the bumper profits of fossil fuel companies.

While this may be limiting EUR’s losses, the Pound Euro exchange rate is still gaining ground.

Furthermore, new data shows that Eurozone industrial production contracted more than forecast in July, printing at -2.3% versus the expected -1%. This seems to have eroded EUR’s fragile support.

Pound Euro Exchange Rate Forecast: Sterling Limited by UK Economic Concerns?

As the session unfolds, the Pound Euro pair may find its gains capped.

Despite easing headline inflation, worries about the UK economy remain. Analysts believe that the mourning period following the Queen’s death – and the bank holiday declared for her funeral – could dent productivity at a time when the UK is teetering on the brink of recession.

In addition, economists are growing concerned about Liz Truss’s energy support package. We are yet to hear the details of the plan, including the rollout and the costs, and businesses fear the implementation could face delays.

As for the Euro, any more news on the EU’s energy crisis plan could prompt movement.

Samuel Birnie

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