Pound Euro (GBP/EUR) exchange rate listless as UK inflation cools further than expected
The Pound Euro (GBP/EUR) exchange rate is flat this morning, as UK inflation hits a two and a half year low.
At the time of writing, GBP/EUR is trading at around €1.1713, showing little movement from the morning’s opening levels.
Pound (GBP) stumbles as inflation cools
The Pound (GBP) is wavering this morning, following news that inflation has fallen to its lowest level for two and a half years.
In February, the UK’s headline consumer price index cooled to 3.4%, below forecasts of a drop to 3.5%. This is appearing to set the stage for the Bank of England (BoE) to begin cutting interest rates this year.
Furthermore, other inflationary pressures show signs of easing, such as falling producer price input inflation.
Charles Hepworth, Investment Director at GAM Investments, commented:
‘This should help translate into additional inflation slowing effects in the months ahead. This disinflationary tailwind will encourage market expectations of rate cuts coming this summer and market forecasts expect three 0.25% cuts for the year in total.’
The figures could induce further volatility over today’s trade. Cooler-than-expected sets the stage for the Bank of England’s (BoE) interest rate decision tomorrow, with markets now considering a more dovish lean.
Euro (EUR) wavers as Lagarde discusses rate cuts
The Euro (EUR) is seeing muted trade this morning, following a speech from European Central Bank (ECB) President Christine Lagarde.
While President Lagarde indicated that the path beyond the first cut remains unclear, she indicated that one was firmly on the horizon. Furthermore, she acknowledged that incoming wage and inflation data had been encouraging.
Lagarde highlighted the conditions needed for rate cuts, referring to slowing wage growth and cooling inflation:
‘If these data reveal a sufficient degree of alignment between the path of underlying inflation and our projections, and assuming transmission remains strong, we will be able to move into the dialling back phase of our policy cycle and make policy less restrictive.’
Additionally, the US Dollar (USD) is strengthening this morning, which is likely serving to further cap EUR’s movements. The pairing shares a negative correlation – as USD rises, EUR sees support diminish.
Pound Euro exchange rate forecast: BoE interest rate decision in the spotlight
Looking ahead for the Pound, the Bank of England takes the stage to announce its latest interest rate decision tomorrow.
Following the morning’s inflation data, the timing of rate cuts from the BoE will be in the spotlight, and any suggestion of looser policy could weaken Sterling.
However, if the central bank remains quiet about the prospect of incoming cuts, the Pound may garner support.
For the Euro meanwhile, the latest Eurozone preliminary PMIs are due to print tomorrow morning. With activity in both the services and manufacturing sector forecast to have improved in March, the common currency could gather pace.
Elsewhere, risk appetite could play a role in shaping the pairing. As the Euro is a safer asset, a shift to bearish trade could support it against the increasingly risk-sensitive Pound.