Pound Euro (GBP/EUR) Exchange Rate Falls as UK Inflation Soars

Pound Euro (GBP/EUR) Slips amid Higher-than-Expected CPI Inflation

The Pound Euro (GBP/EUR) exchange rate slumps as annual UK CPI inflation climbed to a new four decade high of 11.1%.

At time of writing, the GBP/EUR exchange rate is around $1.1402, a 0.55% drop from this morning’s opening levels.

Pound (GBP) Pressured amid Sizeable Rise in Inflation

The Pound (GBP) is struggling for demand this morning in the face of hotter-than-expected inflation data. Jumping up from 10.1% in September to 11.1% in October, CPI leapt to a 41-year high. Core inflation was unchanged but remained high at 6.1%.

Beating out expectations of a 10.7% rise, headline CPI jumped after millions of UK households were hit by soaring energy bills. The cost-of-living crisis continues to escalate, and inflation continues to pull away from the Bank of England’s (BoE) target of 2%. Meanwhile, core inflation remained steady but still painfully high. Excluding volatile prices such as energy, food, tobacco, and alcohol, core inflation remained at 6.5%.

Lending some modest support to Sterling is the heightened expectations of further bold interest rate hikes. Tim Graf, Head of EMEA Macro Strategy at State Street, expects the central bank to remain hawkish:

‘Even though wage growth is not keeping pace with inflation and crack in domestic demand are becoming more obvious, it is nevertheless hard to see anything other than a hawkish response to these numbers from policymakers. No sign of a pivot from the MPC just yet.’

Euro (EUR) Undermined by Escalating Geopolitical Tensions

Meanwhile, the Euro (EUR) is weighed down by a potential escalation in the Ukraine invasion. Reports of a missile landing in Poland, which killed two, are currently being investigated.

A deadly explosion hit Przewodow, a village in eastern Poland, about 6km from the Ukrainian border. Two missiles are set to have hit a grain facility, with mounting concerns that the incident could provoke a wider conflict.

President Joe Biden has said that the missile ‘unlikely’ to have been fired by Russia. However, if findings conclude that Russia was behind the attack, NATO could invoke Article 5, a principle of collective defence. Article 5 is one of the cornerstones of the NATO treaty, where the treaty stipulates:

‘The Parties agree that an armed attack against one or more of them in Europe or North America shall be considered an attack against them all.’

Pound Euro Exchange Rate Forecast: Autumn Statement to Boost the Pound?

Looking ahead, the Pound Euro exchange rate could see fluctuations with the highly-anticipated autumn statement from Chancellor Jeremy Hunt. Fiscal tightening could temper future rate hike bets, but a return to fiscal responsibility could cheer GBP investors.

Meanwhile, BoE Governor Andrew Bailey and several from the Monetary Policy Committee (MPC) are set to testify at the House of Commons this afternoon. Any further hints to monetary policy are likely to sway investors.

Elsewhere, the ongoing investigation into the missile that killed two in Poland is likely to impact global market sentiment. If Russia is to be found responsible for the attack, geopolitical tensions are likely to worsen.

Danny Tingle

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