Pound euro (GBP/EUR) nears two-year high amid stubborn UK inflation

Pound euro (GBP/EUR) exchange rate rises as UK inflation betas forecasts

The pound euro (GBP/EUR) exchange rate is gaining ground this morning following a warmer-than-forecast UK consumer price index.

At the time of writing the GBP/EUR exchange rate is trading at around €1.1907, up approximately 0.2% from this morning’s opening rate.

Pound (GBP) strengthens following UK inflation data

The Pound (GBP) is edging higher this morning following the latest batch of UK inflation data.

The UK’s latest consumer price index came in slightly above forecast in June, printing at 2%, rather than easing further to 1.9%. Meanwhile, core inflation remained unchanged at 3.5%, leaving signs of stubborn UK disinflation to bolster GBP exchange rates, as markets reduce their Bank of England (BoE) interest rate cut expectations.

Anna Leach, Chief Economist at the Institute of Directors, said:

‘The Bank will be relieved that headline inflation has remained at target in June in line with their expectations. That relief will be tempered though by services inflation holding at 5.7%, well above their expectations.’

Inflation is likely to rise slightly in the coming months, as energy price inflation picks up reinforcing sticky services inflation. But all being well, inflation should moderate further out, supporting a downward trend in interest rates.’

Sticky services inflation has remained a challenge for the central bank in recent months, with today’s data showing no deviation from recent trends. As a key measure of domestic inflationary pressures, services inflation remains uncomfortably high at 5.7%, serving to quash expectations tha the BoE could begin to lower rates next month, lifting GBP as the session continues.

Euro (EUR) subdued ahead of ECB rate decision

The euro (EUR) is largely rangebound this morning despite a worse-than-forecast economic outlook in the Eurozone’s largest economy.

While inflation in across the Eurozone was confirmed to have eased to 2.5% in June, marginally dipping from the previous month’s reading of 2.6%, investor focus turns towards the European Central Bank’s (ECB) looming interest rate decision.

With the ECB expected to pause its unwinding cycle, delivering a hold on interest rates at 4.35%, markets continue to speculate over when the central bank’s next rate cut may occur.

Shaan Raithatha, Senior Economist at Vanguard Europe, said:

‘The European Central Bank (ECB) is widely expected to remain on hold on Thursday and this meeting is unlikely to bring in major news. That said, there will be updated language on how the outlook for activity and inflation has evolved since June. Our judgement is that, if anything, a September cut is slightly more likely than six weeks ago.’

Pound euro exchange rate forecast: UK jobs data in focus

Looking ahead, the UK’s latest employment data is due for release tomorrow morning. Unemployment is due to hold steady at 4.4% in May, close to multi-year highs.

In addition to this, the latest wage data is due for release, and could cause notable GBP volatility. With average earnings due to fall to 5.7% in the three months to May 2024, easing wage growth in the UK may spur renewed BoE rate cut expectations.

Looking to the Eurozone, the ECB’s looming interest rate decision is due tomorrow. While the central bank is widely expected to keep interest rates unchanged, ECB President Christine Lagarde’s accompanying speech and press conference will likely be under close scrutiny from markets. Any suggestions from markets surrounding the timings of the central bank’s monetary loosening timeline will be of particular interest to investors.

Yasmine Arasteh

Contact Yasmine Arasteh


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