Pound Euro (GBP/EUR) Sours on Weakening US Dollar
(Updated 12/4/23, 16:45)
The Pound Euro (GBP/EUR) exchange rate is softening in the wake of softer-than-expected US inflation. The negative correlation the Euro shares with the US Dollar sees the former gather strength. Softer-than-expected inflation has seen rate hike bets pared.
Against expectations of headline CPI falling to 5.2%, inflation surprised to the downside and eased even further to 5%, the lowest in two years. Despite inflation remaining almost double the target rate of 2%, the markets are now expecting a pause in the tightening cycle from the Federal Reserve in the near future.
At time of writing, the GBP/EUR exchange rate is around €1.1348, a 0.30% fall from this morning’s opening levels.
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GBP/EUR Quiet as Investors Brace for US Inflation
The Pound Euro exchange rate is wavering amid a lack of major economic data as US inflation data remains the focus.
At time of writing, the GBP/EUR exchange rate is around €1.1366, relatively unchanged from this morning’s opening levels.
Euro (EUR) Boosted by Relative USD Weakness
The Euro (EUR) is finding modest strength this morning despite a lack of data. The negative correlation the Euro shares with the US Dollar has seen the former strengthen.
With the markets remaining quiet ahead of volatile US data this afternoon, investors are moving to the sidelines. The market appears to be holding off bets of a 25bps rate hike from the Federal Reserve until inflation data is released.
With US inflation expected to drop to 5.2% from 6%, and a more cautious Fed, the Euro could rally if the ‘Greenback’ sours. Minutes from the previous Fed policy meeting could also impact proceedings, after the central bank opted to raise interest rates by 25bps.
Credit conditions could also play a major part in Fed monetary policy. With core inflation likely to remain sticky, faltering growth and tightening credit conditions could force the Fed’s hand in pausing its rate cycle. Fed Chair Jerome Powell implied that in the wake of regional banking collapses, tighter credit conditions negated the need to increase rates. EUR investors will be keenly awaiting US data later, and the Euro could rally if the ‘Greenback’ slides on pared rate hike bets.
Pound (GBP) Muted amid Lack of Economic Data
Meanwhile, the Pound (GBP) struggled for demand amid a thin trading calendar. With GDP growth data released tomorrow, Bank of England (BoE) Governor Andrew Bailey will be making two appearances today.
Bailey is expected to speak at the Institute of International Finance, on the topic of ‘the shifting risk landscape’. Any further hints on how the central bank intends to rein in inflation could provide some movement for Sterling. With monetary policy becoming foggier, any clues to how the BoE will proceed could lift the Pound. However, in the wake of the banking sector stress, a more cautious approach could sap demand.
However, with the International Monetary Fund (IMF) confident that inflation will soften drastically this year, there is a chance that the BoE could pause its tightening cycle. Any signal from Bailey that the central bank could leave the interest rate unchanged, the Pound could dip. ING analyst Chris Turner comments:
‘There is a risk that he hints at a pause, having seen fellow central bankers in Australia and Canada do so over recent months.’
Pound Euro Exchange Rate Forecast: Expanding UK Economy to Boost the Pound?
Looking ahead, the Pound Euro exchange rate could see further movement with the release of the latest GDP growth data for the UK. An expected modest 0.1% expansion would mark a second consecutive month of growth. A sustained rebound from a surprise 0.5% contraction in December could cheer GBP investors.
Meanwhile, the negative correlation the Euro shares with the US Dollar could provide fluctuations when the latest US inflation data is released later today. Softening headline CPI could pare further rate hike bets from the Federal Reserve, boosting the Euro.