Pound Euro (GBP/EUR) Exchange Rate Slumps as Traders Reprice Central Bank Expectations
(Updated 16:25, 12/01/23) The Pound Euro (GBP/EUR) exchange rate fell sharply earlier, hitting a a 15-week low. The slump came as the expected policy gap between the Bank of England (BoE) and the European Central Bank (ECB) narrowed.
In the UK, the economic outlook is increasingly dark. Strike action continues to intensify, with more workers voting to stage walkouts over below-inflation pay deals.
Meanwhile, there are expectations that UK inflation may soon begin to ease. US inflation today cooled for the sixth consecutive month, while a new analysis suggests that UK energy bills will fall this year, easing inflationary pressures.
With inflation set to decelerate and the UK facing huge economic challenges, markets are expecting the BoE not to raise interest rates as high as expected.
Meanwhile, ECB policymakers this week have been continually signalling that the bank will press ahead with further interest rate hikes.
The ECB has lagged behind the BoE, but now it looks as though it may catch up. This has caused GBP/EUR to drop to €1.1239, its lowest level since September 2022. At the time of writing, the Pound Euro exchange rate is trading at €1.1256, 0.3% lower than today’s opening level.
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Pound Euro (GBP/EUR) Exchange Rate Firms amid UK Retail Reports
The Pound Euro (GBP/EUR) exchange rate is finding some success this morning as positive results from large UK retailers cheer GBP investors.
At the time of writing, GBP/EUR is trading at around €1.1303, a modest increase from this morning’s opening levels.
Pound (GBP) Enjoys Positive UK Retail Results
The Pound (GBP) has edged higher against the Euro (EUR) today as a number of large UK retailers published positive results over the Christmas period.
Marks & Spencer announced ‘a strong Christmas trading performance’, while Tesco also celebrated good sales results. Jewellery retailer Beaverbrooks posted its best December on record.
Overall, the sales results indicate that demand remained fairly strong over the festive season. Analysts have pointed out that increased revenue came about due to price rises, rather than increased sales volume. However, the reports suggest that consumers are not curbing their spending as much as some economists had feared.
Chris Beckett, Head of Equity Research at Quilter Cheviot, commented:
‘[C]learly customers were prepared to spend more money on food in the run up to Christmas. The worst case scenario with the UK consumer has not yet been realised as the cost of living squeeze has hit but not necessarily altered behaviour drastically. Whether or not this was people simply prioritising Christmas before tightening their belts will be a crucial question in future statements from the pair.’
This cautious optimism has given Sterling a lift this morning.
Euro (EUR) Subdued amid Lack of Data
Meanwhile, the Euro is rather muted this morning amid a lack of Eurozone economic data.
A fairly upbeat market mood may also be subduing the single currency today, as EUR is considered a safer bet than GBP. As a result, amid a slightly risk-on market mood, investors are shunning the safer Euro.
Russia-Ukraine news may also be keeping the common currency on the back foot. Fighting has intensified in the Donbas in recent weeks, with Russia attempting to take key strategic positions. Commentators are also concerned that Russia may be planning to launch a fresh offensive, perhaps using Belarus as a staging post to attack northern Ukraine. These worries seem to be causing anxiety among EUR investors.
Pound Euro Exchange Rate Forecast: US Inflation to Spark Volatility?
Looking ahead, the US inflation rate release this afternoon could cause some turbulence in the Pound Euro exchange rate. Economists expect US inflation to have significantly decelerated once again, which would likely lead to a sharp selloff in the US Dollar (USD) as markets rein in their expectations for further aggressive Federal Reserve interest rate rises.
Such an outcome could support the Euro, as EUR is negatively correlated with USD. However, it could also trigger a risk-on rally in markets, because less aggressive action from the Fed is good for the global economy. If this happens, the riskier Pound could rise while the safer Euro slips.
Either way, the US inflation release could trigger volatility in GBP/EUR this afternoon.