Pound Euro (GBP/EUR) exchange rate surges following inflation uptick
The Pound Euro (GBP/EUR) exchange rate is soaring this morning as the latest UK inflation rate unexpectedly rose from a two-year low.
At the time of writing the GBP/EUR exchange rate is trading at around €1.1662, up approximately 0.4% from this morning’s opening rate.
Pound (GBP) soars following inflation data
The Pound (GBP) is strengthening against its major peers this morning following a surprise uptick in UK inflation.
December’s year-on-year inflation rate came in hotter than expected at 4%, beating economists’ expectations that it would cool to 3.8%.
While Bank of England (BoE) policymakers have suggested that disinflationary deviations may be expected as the central bank aims for its 2% inflation target, markets appear to be resizing their BoE rate cut bets, pushing back expectations of monetary policy loosening in May of this year.
Yael Selfin, Chief Economist at KPMG, observed:
‘The expected overall improvement in the outlook for inflation, coupled with the slowdown in the domestic economy, will likely put the Bank of England in a position to begin cutting interest rates from the second half of the year, potentially lowering rates by (1 percentage point) in 2024.’
Pared back rate cut bets may continue to buoy GBP as today’s session continues, boosting Sterling sentiment throughout the day.
Euro (EUR) stumbles amid stubborn inflation
The Euro (EUR) is fluctuating this morning as the latest Eurozone inflation rate was unchanged.
Eurozone inflation held steady at 2.9% in December’s annual reading, printing in line with expectations.
The data marked the first increase in Eurozone inflation since April 2023, suggesting to markets the European Central Bank (ECB) may hold rates for longer than previously expected amid sticky inflation within the Euro area.
However, with inflation still wavering near a multi-year low, close to the ECB’s target of 2%, markets remain expectant of rate cuts in the earlier half of the year, with many pricing bets on cuts as soon as March, leaving the common currency changeable this morning.
Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics, affirmed:
‘The key question in the near-term is whether inflation in January and February will be soft enough to persuade the ECB to cut interest rates in March. We think it will.’
Pound Euro exchange rate forecast: ECB Speeches to Drive EUR Volatility?
Looking ahead, a speech from ECB President Christine Lagarde may sway investor interest in EUR this afternoon. Amid the latest reports of sticky Eurozone inflation, any hawkish commentary from Lagarde could drive speculation that the central bank may continue to hold off on interest rate cuts throughout the first half of the year, boosting the common currency.
However, should Lagarde strike dovish and advocate for rate cuts, as in recent commentary, investor interest in EUR may wane as the session draws to a close.
Lagarde is due to speak again tomorrow afternoon, following the release of ECB minutes from the latest monetary policy meeting. Lagarde’s commentary will likely be dependent on the contents of the Governing Council’s accounts. As such investors may look to the publication of minutes for an indication as to whether the ECB is likely to prolong their current rate hold.
Turning to the UK, data is in short supply until the release of December’s retail sales data on Friday. A forecast 0.5% contraction in consumer spending may see GBP stumble amid renewed signs of economic weakness.