Pound Euro Exchange Rate Slumps to Six-Week Low as UK Inflation Cools

Pound Euro (GBP/EUR) Exchange Rate Nosedives as Markets Rethink BoE Rate Hike Bets

The Pound Euro (GBP/EUR) exchange rate plunged to a six-week low today as the UK’s latest consumer price index came in below forecasts, with markets scaling back Bank of England (BoE) interest rate expectations.

At the time of writing, GBP/EUR is trading at around €1.1563, having fallen sharply immediately after the UK’s inflation data was published.

Pound (GBP) Plummets following Cooler UK CPI

The Pound (GBP) tumbled this morning after the UK’s August CPI reading led markets to drastically reprice BoE rate hike bets.

Headline inflation unexpectedly cooled last month, easing from 6.8% to 6.7%, rather than rising to 7%. Meanwhile, core inflation fell from 6.9% to 6.2%, below forecasts of 6.8%.

In the wake of the CPI release, markets reined in their expectations for another interest rate hike at tomorrow’s BoE decision. Prior to the inflation data, investors saw an 80% chance of a 25bps increase; now, the odds of a hike are at around 55%.

This pullback saw Sterling slump, with GBP/EUR dropping to a six-week low.

Euro (EUR) Supported by USD Weakness

Meanwhile, the Euro (EUR) is enjoying modest support this morning as the single currency benefits from its strong negative correlation with the US Dollar (USD).

The single currency’s gains may be limited however, amid a lack of market-moving Eurozone economic data this morning.

In addition, the European Central Bank’s (ECB) recent dovish rate decision continues to keep a lid on the Euro.

Pound Euro Exchange Rate Forecast: BoE Decision to See Sterling Fall Further?

Looking ahead, a speech from ECB policymaker Isabel Schnabel could influence the Euro this morning.

Schnabel is known as one of the more hawkish members of the ECB, but uncharacteristically cautious comments from her earlier this month dented the single currency. If she strikes a dovish tone again today, EUR could trim its gains against GBP.

However, with markets having drastically repriced BoE rate hike bets, Sterling is likely to remain subdued through the session.

GBP investors are now solely focused on tomorrow’s BoE decision. Renewed uncertainty could mean that the Pound is particularly volatile. A hike could see GBP jump, while a hold would likely see Sterling slide to new lows.

Even if the BoE does raise interest rates, any indication that the bank is at the end of its tightening cycle could put notable pressure on the Pound.

Samuel Birnie

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