Pound Euro (GBP/EUR) Plunges on Growing Concerns of Economic Slowdown
(Updated 21/6/23, 16:45)
The Pound Euro (GBP/EUR) exchange rate is weakening considerably as fears are growing of a looming recession in the UK. With inflation remaining unchanged at 8.7%, a rate hike is all but expected tomorrow. However, with concerns that the rate will hit 6% by the end of the year, elevated rate hike bets aren’t enough to offset fears of elevated economic pressures.
At time of writing, the GBP/EUR exchange rate is around €1.1624, a 0.53% fall from this morning’s opening levels.
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GBP/EUR Slips amid Added Pressure to BoE
The Pound Euro exchange rate is weakening after UK inflation remains unchanged at 8.7%, adding pressure to the Bank of England (BoE) to keep raising interest rates.
At time of writing, the GBP/EUR exchange rate is around €1.1644, a 0.36% fall from this morning’s opening levels.
Pound (GBP) Undermined by Recession Fears
The Pound (GBP) is under increased selling pressure this morning in the wake of headline CPI shocking the markets and printing hotter than expected. Against predictions of a modest easing to 8.5%, headline inflation remained sticky and held at 8.7%.
Meanwhile, core inflation, excluding volatile prices such as energy and food, rose sharply for the second consecutive month. Accelerating from 6.8% to 7.1%, it was the highest level since 1992 as stubbornly high inflation continues to cause headaches for the BoE ahead of tomorrow’s policy decision.
Despite elevated interest rate hike bets on the back of hotter-than-expected inflation, the fear that the UK could slip into a recession could be weighing on Sterling. With markets pricing in that interest rates could now hit 6% by December, the probability for a half percent rise tomorrow has now jumped to over 40%. But with economists concerned that sky-high borrowing costs could exacerbate the cost-of-living crisis, elevated rate hike bets aren’t particularly supporting Sterling. Jake Finney, economist at PwC, commented on the latest data:
‘UK inflation has once again come in higher than expected at 8.7% in May. This is higher than the 8.5% consensus and the Bank of England’s forecast of 8.3% in May. More troublingly, core CPI – which is considered to be indicative of underlying inflation pressures – unexpectedly increased to 7.1%.
‘Higher inflation means that the squeeze on household incomes isn’t over yet, despite strong wage growth. It also cements a rate hike from the Bank of England tomorrow and means an August rate hike is now more likely than not.’
Euro (EUR) Supported by Hawkish ECB
Meanwhile, the Euro (EUR) is finding relative strength against most of its peers despite a lack of economic data. A continued hawkish rhetoric held from the majority of European Central Bank (ECB) policymakers could be keeping the Euro buoyed.
However, an air of caution also permeates several members. Yesterday, ECB policymaker Boris Vujčić warned that there is a risk of doing ‘too much vs too little’, adding that a soft landing from elevated inflation might not be possible. But ECB Governing Council member Oli Rehn echoed previous hawkish sentiments and warned that underlying inflation is only gradually easing. Growing expectations of another rate hike in September could be supporting the Euro.
Pound Euro Exchange Rate Forecast: 50bps Rate Hike to Boost the Pound?
Looking ahead, the Pound Euro exchange rate could see further movement with the latest interest rate decision from the BoE. In the wake of stronger-than-expected inflation, markets are now predicting a 40% chance of a 50bps raise. With a 13th consecutive hike all but confirmed, focus will shift to hints on the August meeting. Prolonged tightening could keep the Pound supported.
Meanwhile, the Euro will be left to trade on market sentiment and ECB speeches. With ECB board member Isabel Schnabel due to talk this evening, any further hawkish comments on the central bank’s monetary policy going forward could keep the Euro supported.