Pound Euro (GBP/EUR) Exchange Rate Rises following Unexpected Rise in UK CPI
(Updated 09:10, 22/3/23) The Pound Euro (GBP/EUR) exchange rate recouped some of yesterday’s losses this morning after the UK’s latest consumer price index showed a surprise rise in inflation.
Annual inflation rates rise again following the easing in Jan 2023:
▪️ Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 9.2% in the 12 months to Feb 2023, up from 8.8% in Jan 2022
▪️ CPI rose by 10.4%, up from 10.1%➡ https://t.co/VVfmybQmsG pic.twitter.com/l1dXAi7yyk
— Office for National Statistics (ONS) (@ONS) March 22, 2023
February’s figures showed that headline inflation increased from 10.1% to 10.4%, rather than falling to 9.9%. Core inflation – which strips out volatile items like fuel and food – also unexpectedly ticked higher, rising from 5.8% to 6.2%, above the anticipated 5.7%.
The reading shows the first uptick in UK inflation since October, putting pressure on the Bank of England (BoE) to raise interest rates at its policy meeting tomorrow.
Expectations that the BoE will move ahead with a 25bps hike have lifted the Pound (GBP) this morning. However, GBP/EUR has so far only managed to recoup half of yesterday’s losses. At the time of writing, the Pound Euro pair is trading at €1.1386, up 0.3% since this morning’s opening levels.
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Pound Euro (GBP/EUR) Exchange Rate Continues to Slide as BoE Decision Looms Over Sterling
(Updated 15:15, 21/3/23) The Pound Euro (GBP/EUR) exchange rate extended its selloff today as the possibility of a rate hike pause from the Bank of England (BoE) weighs heavily on the Pound (GBP).
Following last week’s labour market data and signs of global financial instability, markets now see an even chance that the BoE will either raise interest rates by 25bps or leave them on hold this Thursday. With the bank potentially at the end of its hiking cycle, the Pound has come under significant pressure.
A possible pause in the BoE’s tightening plans is in sharp contrast to the European Central Bank (ECB), as the latter raised rates by 50bps last week. Following the decision, multiple ECB policymakers voiced their support for a further hike in May. Markets are pricing in another 25bps move at the bank’s next meeting, which would bring the deposit facility rate to 3.25%.
Today, ECB rate setter Pablo Hernandez de Cos suggested that the ECB could move even higher than this. These signs of a potential policy divergence dragged GBP/EUR lower today.
In addition, broad-based weakness in the US Dollar (USD) aided the Euro, due to the currencies’ negative trading correlation.
At the time of writing, the Pound Euro rate is at €1.1335 – a 1% drop on today’s opening levels.
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Pound Euro (GBP/EUR) Exchange Rate Tumbles ahead of BoE Meeting
The Pound Euro (GBP/EUR) exchange rate fell sharply this morning as markets remain unsure about the outcome of the upcoming Bank of England (BoE) decision. Meanwhile, the recovery in European financial markets is underpinning the single currency.
At the time of writing, GBP/EUR is trading at €1.1365, a 0.7% decline on the day.
Pound (GBP) Pressured amid BoE Pause Bets
The Pound (GBP) came under selling pressure today amid expectations that the BoE could leave interest rates unchanged at its policy meeting on Thursday.
Markets had broadly expected the BoE to hike rates by another 25bps, but recent events have seen traders price in a fifty-fifty chance that the bank will hold interest rates at the current level.
Amid a backdrop of slowing UK wage growth and signs of strain in global financial markets, voices are calling on the bank to pause its policy tightening.
Notable UK newspapers – including the Guardian and the Daily Mail – have published opinion pieces urging the BoE not to raise rates. The bank faced fierce criticism for not tightening rates fast enough at the start of its hiking cycle, so it may be susceptible to public pressure.
In addition, the EY Item Club – an influential thinktank – has said in recent days that it believes the bank has ‘already reached’ its terminal rate. Although markets still see a decent chance of a rate hike on Thursday, the uncertainty is pressuring GBP.
Euro (EUR) Firms despite German Data Miss
Meanwhile, the Euro (EUR) has managed to strengthen against Sterling despite downbeat German data.
Germany’s ZEW economic sentiment index dropped from 28.1 to 13 in March, worse than the forecast 17.1. This was the first fall in six months and the lowest level since December.
However, the common currency shrugged off the decline in investor morale in the Eurozone’s largest economy.
Instead, EUR remains buoyed by the ongoing stabilisation in European financial markets. Following a coordinated intervention from the world’s top central banks, calm has returned to the banking sector, thereby easing EUR investors’ fears.
Pound Euro Exchange Rate Forecast: ECB’s Lagarde in Focus
Looking ahead, European Central Bank (ECB) President Christine Lagarde is due to speak just after noon today.
Lagarde recently indicated that the ECB would certainly be planning to raise interest rates again at its next meeting were it not for the recent turmoil in the European banking sector. If Lagarde clarifies her position today, it could impact EUR. Signals of more rate rises to come could boost the Euro while a more cautious tone could dent it.
As for Sterling, the Pound could remain restrained amid investor hesitancy ahead of the UK’s latest consumer price index tomorrow. Economists expect a slight cooldown in inflation ahead of the BoE’s rate decision on Thursday.
The UK CPI could be a decisive factor in the BoE’s decision making. A hot reading would put more pressure on the bank to raise rates, likely boosting Sterling, while a weaker reading may add to expectations of a hold and therefore hurt GBP.