Pound Euro (GBP/EUR) Firms amid Mixed Euro Area Inflation Data
The Pound Euro (GBP/EUR) exchange rate is strengthening as hotter-than-expected headline Eurozone inflation is offset by cooling core inflation.
At time of writing, the GBP/EUR exchange rate is around €1.1662, a 0.29% leap from this morning’s opening levels.
Euro (EUR) Slips as Inflationary Pressures Persist
The Euro (EUR) tumbled as the latest inflation data in the Eurozone steadies at 5.3% instead of easing to 5.1%. Despite remaining far above the target rate of 2%, core inflation surprised to the downside, paring rate hike bets.
Headline consumer price inflation increased by 5.3% in the year up to July, coming above market predictions of a 5.1% rise. However, core inflation, excluding volatile items such as food and energy, slowed to 5.3%. With the core reading meeting expectations of a slowdown, the mixed inflation picture is weighing on rate hike bets from the ECB. Bert Colijn, economist at ING, commented on the latest data:
‘For the European Central Bank, these August inflation data were among the most important data points ahead of the governing council meeting in two weeks’ time. While inflation remains stubborn enough to make ECB hawks uncomfortable, it does look like a further deceleration in inflation is in the making for the months ahead.’
Pound (GBP) Supported by Hawkish BoE Speech
Meanwhile, the Pound (GBP) is finding mixed success this morning amid a lack of major economic data. A hawkish speech from Bank of England (BoE) Chief Economist and improving business confidence helped support Sterling.
Speaking at a research conference organised by the South African Reserve Bank this morning, Pill reiterated the need to bring inflation down. With the markets expecting the central bank to raise interest rates for the 15th consecutive row, Pill said that he’s backing a ‘Table Mountain’ approach to interest rates, keeping them high for longer, rather than cutting them too quick. He added:
‘The key element is that we on the MPC (Monetary Policy Committee) need to see the job through and ensure a lasting and sustainable return of inflation to the 2% target.’
‘At present, the emphasis is still on ensuring that we are – in the words of the MPC’s last statement – sufficiently restrictive for sufficiently long to ensure that we have that lasting return to target.’
Also providing a modest lift to Sterling is the latest business barometer from Lloyds Bank. The monthly survey revealed that company optimism across the board climbed to its highest level since February 2022. With hopes that the BoE are nearing the end of their aggressive tightening cycle, business optimism is improving.
Pound Euro Exchange Rate Forecast: ECB Speech to Boost the Euro?
Looking ahead, the Pound Euro exchange rate could see further movement with a speech from ECB Vice President Luis de Guindos. In light of the latest inflation data, Guindos could cheer investors if he maintains a hawkish stance and reiterates the need to bring inflation down to target through further tightening.
Meanwhile, the Pound could slide if final manufacturing PMI data confirms the preliminary data. A 13th consecutive contraction could weigh on Sterling as factory activity remains weak.