Pound Euro (GBP/EUR) Climbs on Increased BoE Rate Hike Bets
The Pound Euro (GBP/EUR) exchange rate strengthened as inflation unexpectedly jumped to 10.4% in February, exacerbating the cost-of-living crisis.
At time of writing, the GBP/EUR exchange rate is around €1.1448, a 0.25% jump from this morning’s opening levels.
Pound (GBP) Firms as Inflation Boosts Rate Hike Expectations
The Pound (GBP) is finding renewed strength this morning in the wake of hotter-than-expected inflation. Against expectations of a modest easing down from 10.1% to 9.9%, headline CPI jumped back up and hit 10.4%.
The latest reading marked the first increase in four months. The biggest drivers were the cost of food and non-alcoholic drinks as they surged by 18%, the highest since 1977. Bad weather in Africa and southern Europe pushed the cost of vegetables up. Higher energy prices also continued to drive prices up.
The unexpected climb in inflation will no doubt add pressure to the Bank of England (BoE) to raise interest rates tomorrow. GBP investors are buoyed after yesterday’s evenly split prediction between a raise and a pause, those odds have now leapt favourably for the former. The markets are now pricing in a 95% chance of the central bank raising interest rates by 25bps.
Kitty Ussher, Chief Economist at the Institute of Directors, commented that the BoE’s job is not yet over, adding:
‘February’s CPI inflation rate is higher than expected, driven predominantly by high monthly price rises in food, hospitality and clothing.
‘In recent days some have suggested that the febrile environment in the banking sector should give central banks pause for thought before raising rates further. Today’s data suggests the opposite; the Bank of England’s job is not yet done.’
Euro (EUR) Supported by Hawkish ECB
Meanwhile, the Euro (EUR) is trading in mixed conditions this morning as a maintained hawkish stance from the European Central Bank (ECB) is helping limit losses.
Several ECB members continued to toe the hawkish line yesterday, keeping the Euro supported. Spanish central bank head Pablo Hernandez de Cos was bullish in his defence of both the Spanish and European banking system, citing resilience and sound liquidity and capital positions.
ECB policymaker Martins Kazaks reassured the market yesterday that the European banking system remains strong, and there is no reason to compare the current financial situation with 2008. He added:
‘Uncertainty in the financial markets is high, but European banks are well capitalized.’
Pound Euro Exchange Rate Forecast: BoE Interest Rate Hike to Bolster the Pound?
Looking ahead, the Pound Euro exchange rate could see further movement with the BoE interest rate decision tomorrow. After an even split between a pause and hike yesterday, today’s red-hot inflation reading has seen rate hike bets soar. If the BoE opts to increase the interest rate, Sterling could climb higher.
Meanwhile, the Euro could muster some strength with speeches from both ECB President Christine Lagarde and Chief Economist Philip Lane. Any further hawkish speeches could lift the single currency.