Pound euro (GBP/EUR) firms amid easing German price pressures
(Updated 16:30, 29/08/24) The pound euro (GBP/EUR) exchange rate is climbing higher this afternoon following news of cooler-than-forecast German inflation.
Germany’s latest consumer price index revealed that inflation in the Eurozone’s largest economy eased to 1.9% in August, falling below market projections of 2.1% and softening from the previous month’s 2.3%.
The release served to reinforce speculation that the European Central Bank (ECB) will likely cut interest rates next month as inflation in some of the bloc’s larger economies rapidly dip below the central bank’s 2% target rate.
Additionally, ECB Governor Philip Lane expressed confidence towards falling price pressures, stoking speculation of additional rate cuts throughout 2024. In turn, the euro (EUR) trended broadly as ramped up rate cut bets sapped appeal for the common currency.
Carsten Brzeski, Global Head of Macro at ING, commented:
‘If confirmed by tomorrow’s eurozone inflation data, today’s German data should make the decision to cut interest rates at the September meeting a bit easier for the ECB. Fading inflationary pressure combined with fading growth momentum offer an almost perfect macro backdrop for another rate cut.’
Looking to the pound (GBP), an ongoing spell of profit-taking undermined GBP amid a lack of fresh UK releases.
Going forwards, could signs of decelerating price pressures in the Eurozone cement expectations of a September rate cut, thereby sinking EUR?
At the time of writing, GBP/EUR is trading at €1.1886, up approximately 0.2% from this morning’s opening levels.
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Pound euro (GBP/EUR) exchange rate firms despite improving EU sentiment
The pound euro (GBP/EUR) exchange rate is trending higher this morning despite an improved economic sentiment in the Eurozone.
At the time of writing the GBP/EUR exchange rate is trading at around €1.1898, up approximately 0.2% from this morning’s opening rate.
Euro (EUR) stymied by worsening German outlook
The euro (EUR) is stumbling this morning due to its negative correlation with a strengthening US dollar (USD).
Despite the release of a better-than-forecast economic sentiment indicator in the Eurozone today, EUR remains on the back foot. While the index rose to its highest level in over a year, reaching 96.6 in August and increasing from an upwardly revised 96 in the previous month, analysts have largely attributed increased optimism and activity in the bloc to the Paris Olympic Games.
Bert Colijn, Senior Eurozone Economist at ING, said:
‘The Economic Sentiment Indicator was mainly boosted by the French data, which immediately suggests that optimism around the Olympics boosted sentiment, similar to the PMI.
We therefore don’t want to overinterpret the French jump here. Overall, eurozone manufacturing order books remain weak, recent production did not improve and inventories remain high. This is consistent with a sluggish environment which does not signal an expected turnaround in the short-run.’
Meanwhile, as USD continues to recover from oversold conditions, EUR will likely remain a less favourable investment option.
Pound (GBP) pressured by UK economic pessimism
The pound (GBP) is slipping against some of its rivals this morning amid a lack of data, though continues to post gains against its European counterpart.
Following a period of sharp appreciation in recent weeks, appeal for the increasingly risk-sensitive pound continues to wane this morning, as increased profit taking coupled with a cautious market sentiment leaves the increasingly risk-sensitive pound on the backfoot.
Elsewhere, fresh concerns of further economic downturn in the UK stymie GBP’s progress, following UK Prime Minister Keir Starmer’s recent warnings of a ‘painful’ Autumn Budget this year.
Analyst at ING noted:
‘Very much in focus now is UK Chancellor Reeves’ first budget at the end of October. There is much speculation over £20bn of tax increases coming through – worth around 0.7% of GDP. However, this may not represent fiscal tightening since she will be using the money to address the real-terms cut in public spending under the previous Conservative government.’
Could concerns of aggressive UK tax rises dampen hopes of UK economic stability under Britain’s new Labour government, thereby hampering GBP exchange rates today?
Pound euro exchange rate forecast: German inflation in focus
Looking ahead, the key focus for EUR investors today will be Germany’s consumer price index, due this afternoon. The index is due to ease to 2.1% in August, cooling from 2.3% in the previous month. Should the data print as forecast, signs of rapidly falling inflation in the Eurozone’s largest economy may serve to revive expectations of an interest rate cut by the European Central Bank (ECB) next month.
Additionally, a speech by ECB Governor Philip Lane could impact EUR exchange rates today, with any dovish remarks likely to undermine the single currency.
Looking to the UK, a lack of fresh data today could see the increasingly risk-sensitive currency exposed to global risk dynamics. A prevailing cautious sentiment could further stifle the pound, while an improving mood may lend GBP support.