GBP/EUR Exchange Rate Steady Following German Inflation Figures
(Updated 14:05 31/5/2022) The Pound Euro (GBP/EUR) exchange rate is trading with negligible gains this afternoon, with the pairing having pulled back slightly from a year-to-date high following the release of Germany’s consumer price index.
May’s preliminary figures reported headline inflation in the Eurozone’s largest economy cooled more than expected. Falling from 7.2% to 6.1%, versus a forecast drop to 6.1%.
Despite the underwhelming inflation denting European Central Bank rate hike expectations, the GBP/EUR exchange rate has been so far unable to breach €1.16.
This comes amid a broader pullback in the Pound as it struggles to sustain its recent bullish momentum.
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Pound Euro Exchange Rate Refreshes 2023 High
The Pound Euro (GBP/EUR) exchange rate trades at a year-to-date high this morning, as Sterling is underpinned by Bank of England (BoE) interest rate expectations.
At the time of writing the GBP/EUR exchange rate is trading at around €1.1588. Up roughly 0.2% from this morning’s opening rate.
Pound (GBP) Supported by BoE Rate Hike Bets
The Pound (GBP) continues to catch bids this morning amid speculation the BoE could deliver several more interest rate hikes in the coming months.
Following on from last week’s UK inflation surprise – which saw headline inflation cool less than expected and core inflation unexpectedly soar – GBP investors have been furiously repricing their BoE rate hike expectations.
Markets had previously thought the BoE was close to ending its hiking cycle after raising rates to 4.5% at its May meeting. However, analysts now see the BoE raising rates as high as 6% before the end of 2023.
Benjamin Schroeder, Senior Rates Strategist at ING said:
‘The UK inflation surprise has hit a nerve amid concerns that central banks’ jobs are far from over… The market is now [sees] a good chance that the Bank of England could push up interest rates to 5.5% before the year ends.’
However, there are clear downside risks to the Pound, amid signs the currency may be entering overbought territory.
Euro (EUR) Slips on French Inflation Miss
The Euro (EUR) faces headwinds this morning following the publication of France’s consumer price index.
May’s preliminary CPI reading reported inflation fell from 5.9% to 5.1%. This was below forecasts for a more modest drop to 5.5% and was the lowest rate of inflation in over a year.
Signs inflation within the Eurozone may be cooling at a faster than expected pace is weighing on EUR exchange rates. As it relieves pressure on the European Central Bank (ECB) to continue raising interest rates.
However, helping to temper the Euro’s losses this morning are comments from ECB policymaker Madis Muller. Muller suggested that with core inflation showing no signs of slowing, ‘It is very likely that the ECB will hike by 25 bps more than once.’
Pound Euro Exchange Rate Forecast: German Inflation in the Spotlight
Still to come today is the publication of Germany’s consumer price index, which is scheduled for 13:00 BST.
Similarly to the French CPI figures, this is expected to report a sharp deceleration of inflation in the Eurozone’s largest economy.
This could see the Pound Euro (GBP/EUR) exchange rate break the €1.16 barrier this afternoon as it is likely to dampen ECB rate hike bets.
On the other hand, a speech by ECB President Christine Lagarde may help to shore up the Euro if she strikes a broadly hawkish tone.
Meanwhile, in the absence of any notable UK data, any movement in the Pound is likely to remain linked to BoE rate expectations. This may underpin support for Sterling if GBP investors remain confident the bank will need to raise rates above 5%.