Pound Euro (GBP/EUR) Exchange Rate Slumps as Traders Pare BoE Bets
(Updated 16:40, 15/2/23) The Pound Euro (GBP/EUR) exchange rate extended its downside today, slumping from a two-week high to a one-week low following the UK CPI release.
GBP/EUR fell from €1.1342 to €1.1230 – a decline of 1% – before bouncing back to €1.1255, where it is at the time of writing.
The downside in the Pound (GBP) came as traders ruled out another 50bps interest rate hike from the Bank of England (BoE) in March due to a larger-than-expected cooldown in UK inflation.
Meanwhile, a decidedly downbeat market mood added to GBP/EUR’s woes. Amid the gloomy sentiment, investors shunned the riskier Pound in favour of the safer Euro (EUR).
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Slides following UK Inflation Reading
The Pound Euro (GBP/EUR) exchange rate fell sharply this morning after the UK’s latest consumer price index dampened Bank of England (BoE) interest rate rise expectations.
At the time of writing, GBP/EUR is trading at around €1.1258, down 0.7% on the day.
Pound (GBP) Dives as UK Inflation Cools
The Pound (GBP) tumbled this morning after January’s CPI release revealed a larger-than-forecast cooldown in UK inflation.
Economists had expected the headline reading to ease from 10.5% in December to 10.3% in January. Instead, it eased to 10.1%.
Core inflation also cooled more than anticipated, printing at 5.8% rather than 6.2%, down from 6.3% the previous month.
Economists are hopeful that this may represent the start of a sharper fall in inflation, which has remained persistently high in recent months.
An encouraging UK inflation report. There were just signs in the November & December reports that UK was at risk of becoming an outlier. Less compelling in today's report. Core inflation pressures easing to +5.8% YoY (+6.3% prev.) probably the most pleasing data point. pic.twitter.com/SHr4vYlgIa
— Simon French (@Frencheconomics) February 15, 2023
While this is good news for the British economy, it’s bad news for the Pound. With inflation now showing more encouraging signs of declining – particularly the notable drop in the core rate – the Bank of England may choose to take a more cautious approach.
As traders repriced their expectations for more BoE rate hikes, Sterling suffered a sharp drop.
Euro (EUR) Firms despite Decline in Production
Meanwhile, the Euro (EUR) strengthened against the Pound in early trade as a risk-off market mood boosted the safer single currency’s appeal.
After a recent bullish tilt among global investors, traders are now wary of rising geopolitical tensions and the economic risk of further interest rate rises from the world’s key central banks.
Mixed Eurozone data did little to deter EUR bulls. Industrial production in the bloc contracted more than forecast in December, printing at -1.1% rather than -0.8%.
However, the Eurozone’s balance of trade figure exceeded forecasts, with the bloc’s trade deficit unexpectedly narrowing from €11.7bn to €8.8bn.
Pound Euro Exchange Rate Forecast: Sterling to Remain Subdued?
As the day unfolds, GBP/EUR could remain subdued as markets continue to digest the slowdown in UK inflation.
Meanwhile, Russia-Ukraine worries could have an adverse impact on the Euro. Amid speculation that Russia’s fresh ground offensive has already begun, any signs of escalating attacks could trouble EUR investors, thereby helping Sterling claw back some losses.
Later this afternoon, US data could impact the Pound Euro pairing. Will a forecast recovery in American retail sales cheer markets, potentially supporting the riskier Pound? Or could a positive reading raise Federal Reserve interest rate rise expectations, sparking risk-off trade and denting GBP?