Pound Euro Exchange Rate Bounces but Remains Weak following UK CPI

Pound Euro (GBP/EUR) Exchange Rate Recoups Losses, Remains Low

(Updated 16:00, 19/10/22) The Pound Euro (GBP/EUR) exchange rate regained some ground earlier today, although it remains down from this morning’s opening levels. At the time of writing, GBP/EUR was trading at around €1.1500, 0.1% lower than at the start of today’s European session.

The initial downside in the Pound (GBP) came after UK inflation exceeded forecasts. Not only did this stoke fears about the country’s worsening cost-of-living crisis, but it also put fresh pressure on government bonds and exacerbated financial stability concerns.

However, the Euro (EUR) also faced headwinds, allowing GBP/EUR to recoup some losses. Eurozone inflation printed below preliminary estimates dampening European Central Bank (ECB) interest rate rise bets.

In addition, growing concern over the escalating conflict in Ukraine troubled EUR investors.

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Pound Euro (GBP/EUR) Exchange Rate Falters following UK Inflation

After regaining some ground overnight, the Pound Euro (GBP/EUR) exchange rate stumbled this morning amid congoing concerns about the UK’s cost-of-living crisis.

At the time of writing, GBP/EUR is trading at €1.1473. This is marginally up from an earlier low of €1.1452 but still down around 0.25% on the day.

Pound (GBP) Drops amid Uncertain UK Outlook

The Pound (GBP) slipped as today’s European session began following the latest UK CPI report.

In September, inflation in the UK edged back up to 10.1% from 9.9%, exceeding expectations of 10%. While this puts more pressure on the Bank of England (BoE) to hike interest rates, it failed to boost the Pound.

Instead, GBP investors seem more concerned about the UK’s deepening cost-of-living crisis. Britons face a tightening squeeze on incomes, with inflation outpacing wages and prices soaring across the board.

Additionally, higher inflation puts further strain on already-stretched public finances, while rising interest rates could choke off the UK’s housing market and the wider economy.

Political jitters could be adding to GBP investors’ anxiety today. Prime Minister Liz Truss will face a crucial PMQs today – the first time she has had to debate MPs since sacking her Chancellor Kwasi Kwarteng and having her budget ripped up by his replacement. Truss’s premiership hangs by a thread, and worries of renewed political instability may be weighing the Pound Euro rate.

Euro (EUR) Gains Capped amid Muted European Mood

Meanwhile, the Euro (EUR) was initially subdued today, which capped EUR’s gains against the weakening Pound.

A gloomy mood in European markets seems to be sapping investor appetite for the single currency.

In addition, EUR’s negative correlation with the US Dollar (USD) is applying some pressure. The safe-haven Dollar is rising amid the risk-off market mood, thereby exerting downward pressure on the Euro.

EUR traders also seemed quiet ahead of the final Eurozone inflation rate reading. Euro area inflation came in marginally below the flash estimate but still revealed a huge 0.8 percentage point jump in September. This below-forecast figure may see the Pound Euro rate recoup some losses.

Pound Euro Rate Forecast: UK Politics to Pressure GBP?

Looking ahead, UK political news could drive movement in the Pound today. Truss’s performance at PMQs may be crucial to her survival. If she can show her party that she is still an asset as Prime Minister, Sterling could potentially stabilise. However, if the Tory backbenchers are unconvinced, the Pound could remain vulnerable.

As for the Euro, the Russia-Ukraine conflict could impact the single currency. Attacks have escalated in recent weeks, with EUR investors worried about the uncertainty and the economic impacts of a drawn-out war. If the situation continues to worsen, EUR could pare its gains.

Samuel Birnie

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