Pound Euro (GBP/EUR) Exchange Rate Tumbles as Markets Rein in BoE Bets
(Updated 17:00, 19/07/23) The Pound Euro (GBP/EUR) exchange rate slumped this morning after UK inflation missed forecasts, leading investors to scale back their bets on more Bank of England (BoE) interest rate rises.
The latest consumer price index showed that both headline and core inflation cooled last month, raising hopes that UK inflation may finally be on a sustained downward path.
However, this was bad news for the Pound (GBP). Analysts now expect the BoE to opt for a smaller 25bps hike at its August meeting, rather than a 50bps move, while the terminal rate is set to peak below 6%.
These expectations saw Sterling slump, and the Pound was unable to regain the upside against the Euro (EUR) as the day progressed.
At the time of writing, GBP/EUR is trading at €1.1521, down 0.75% on the day.
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Pound Euro (GBP/EUR) Exchange Rate Slumps as UK CPI Cools
The Pound Euro (GBP/EUR) exchange rate plummeted this morning after a cooler-than-expected UK consumer price index saw markets reprice Bank of England (BoE) expectations.
At the time of writing, GBP/EUR is trading at around €1.1513, having shaved one cent off its value since today’s trade began.
Pound (GBP) Nosedives as Softer Inflation Dents BoE Bets
The Pound (GBP) crumbled this morning after the UK’s latest CPI showed a faster-than-forecast cooldown in UK inflationary pressures.
Headline inflation eased from 8.7% to 7.9%, its lowest level since March 2022, versus forecasts of a more modest drop to 8.2%. Meanwhile, core inflation cooled from 7.1% to 6.9%; economists had expected it to hold steady.
This is the first time UK inflation has printed below expectations in five months, so the shock was even more pronounced.
While easing inflationary pressures is great news for the UK economy, it’s bad news for the Pound. Higher interest rates usually increase a currency’s attractiveness to investors, and markets now believe the BoE won’t raise rates as aggressively.
Prior to the CPI release, the consensus was that the bank would raise rates by 50bps at its meeting in two weeks’ time. Now markets are expecting a 25bps hike, and they no longer see rates peaking above 6%.
This has led to a sharp correction in GBP exchange rates, with both GBP/EUR and GBP/USD crashing around 0.8%.
Euro (EUR) Buoyed as Core Inflation Revised Higher
Meanwhile, the Euro (EUR) is enjoying some support after a slight upward revision to the Eurozone’s core inflation rate.
According to the bloc’s final CPI, underlying inflation edged up from 5.3% to 5.5%, higher than a preliminary reading of 5.4%. While Eurozone inflation is far below the levels seen in the UK, the European Central Bank (ECB) has made clear that persistent core inflation would push it to continue raising rates.
As a result, today’s firmer reading is helping the Euro gain against the plummeting Pound.
Pound Euro Exchange Rate Forecast: Sterling to Remain Subdued?
Looking ahead, Sterling could remain firmly on the back foot today as the UK CPI print continues to dampen GBP demand.
However, a prevailing upbeat market mood may limit GBP/EUR’s losses, or even help the pairing regain some ground. The Pound is seen as a more risk-sensitive currency than the safer Euro, so if the current positive tone among investors persists then Sterling could find support.
Turning to tomorrow, another expected contraction in German producer prices could put some pressure on the common currency. Signs of easing wholesale inflation in the Eurozone’s largest economy could dampen ECB bets, thereby denting EUR.
The next major data release, however, isn’t until Friday when the UK’s retail sales report is out. Analysts expect sales growth to have slowed but remained in positive territory. Could another above-forecast reading see GBP/EUR recoup losses?