Pound euro (GBP/EUR) exchange rate flat despite stickier-than-expected UK inflation
The pound euro (GBP/EUR) exchange rate is narrowing this morning, despite UK inflation printing above market expectations.
At the time of writing, GBP/EUR is trading at around €1.1722, showing little movement from the morning’s opening rates.
Pound (GBP) firms amid stickier-than-expected inflation
The pound (GBP) is ticking higher this morning, in the wake of the UK’s latest inflation data. While both headline and core inflation rates cooled from previous levels, they remained above forecasts.
Headline inflation printed at 3.2%, down from 3.4%, but above expectations of a 3.1% reading. This is prompting investors to reevaluate the likelihood of imminent interest rate cuts from the Bank of England (BoE).
With inflation appearing stickier than initially expected, investors are slashing their expectations of rate cuts. Markets are now pricing in roughly 34bps of loosening, equivalent to one rate cut this year. Further cuts are now up in the air.
Tomasz Wieladek, Chief European Economist at T Rowe Price, commented:
‘Together with the rising momentum in wage inflation, the sticky services inflation numbers raise the risk the UK inflation battle is far from over and perhaps not yet won. The MPC will be worried about this scenario, and I believe this strong reading will make the MPC cautious about cutting early in the summer.’
Elsewhere, a cautiously upbeat market mood is likely bringing additional support to Sterling, due to its increasingly risk-sensitive nature.
Euro (EUR) undermined by ECB Fed divergence
The euro (EUR) is under pressure this morning, following signs of an increasing divergence between the European Central Bank (ECB) and its peers.
Yesterday, ECB President Christine Lagarde spoke to CNBC during the International Monetary Fund’s (IMF) spring meetings. During this, she gave the clearest indication yet that the central bank was heading towards cutting interest rates.
Lagarde stated that:
‘We just need to build a bit more confidence in this disinflationary process but if it moves according to our expectations, if we don’t have a major shock in development, we are heading towards a moment where we have to moderate the restrictive monetary policy.’
While she declined to comment on specific timings, this is weighing on EUR this morning as investors continue to bet on a June rate cut.
Pound euro exchange rate forecast: Improving UK retail sales to lift pound?
Looking ahead for the pound, the core catalyst of movement is likely to be March’s retail data, due on Friday.
On a monthly basis, economists forecast that sales in the UK’s vital sector increased by 0.3%, which could strengthen Sterling. The data would be indicative of improving consumer spending, which may lead to further decreases in BoE rate cut bets, lifting GBP.
For the euro, a lack of data may shift focus to a series of speeches from European Central Bank policymakers. This afternoon, Isabel Schnabel is due to deliver remarks.
As one of the more hawkish members of the ECB, if she advocates for keeping interest rates unchanged for longer, EUR may rise.
Elsewhere, risk appetite is likely to play a role in shaping the pound euro exchange rate. As the euro is a safer currency, bearish trade could weaken GBP/EUR.