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Euro pound (EUR/GBP) edges lower amid stubborn UK services inflation

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Euro pound (EUR/GBP) ticks down following UK inflation data

The euro pound (EUR/GBP) exchange rate is retreating this morning following the latest batch of UK inflation data.

At the time of writing the EUR/GBP exchange rate is trading at €0.8438, down approximately 0.2% from this morning’s opening rate.         

Euro (EUR) wavers amid data lull

The safe-haven euro (EUR) is struggling to attract investor support this morning amid a lack of fresh releases.

With data in short supply, ongoing political uncertainty in France surrounding the upcoming snap election serves to deter investor support in the common currency. As Eurosceptic and far right parties gain ground ahead of the vote, markets have expressed concern over how this may impact the euro in months to come.

In addition to this, widespread economic pessimism further capped EUR’s upside potential, as the European Central Bank (ECB) warned against long-term fiscal risks stemming from climate change, defense spending and elderly populations.

The central bank cautioned:

‘These developments will be challenging enough in isolation, and countries will face all of them simultaneously. Consequently, action needs to be taken today – especially in high-debt countries grappling with elevated interest rates.’

This will likely see the single currency falter against its rivals as the session progresses with no further macroeconomic releases due out for the remainder of the day.

Pound (GBP) strengthens amid stubborn services inflation

The pound (GBP) is largely strengthening today following the latest UK inflation data.

While both headline and core inflation eased as forecast to 2% and 3.5%, respectively, services inflation came in hotter-than-forecast, printing at 5.7% in May. Though easing from April’s 5.9%, the data printed notably higher than forecasts of 5.3%, suggesting that stubborn inflation persists in the UK’s vital services sector.

Services inflation focusses primarily on domestic goods and is less affected by wider global factors, suggesting that UK disinflation remains a challenge for the Bank of England (BoE).

James Smith, Developed Markets Economist at ING, commented:

‘Indeed at 5.7%, it’s now 0.4 percentage points above the Bank’s forecast from the May Monetary Policy Report. That all but confirms the BoE will keep rates on hold tomorrow. But it doesn’t necessarily change the game for August’s meeting.’

However, with the UK’s key consumer price index (CPI) falling to 2%, landing on the central bank’s target rate, the likelihood of a summer interest rate cut remains high and aligns with market projections of an August interest rate cut. As such, GBP’s upside potential may be somewhat limited as the session progresses, ahead of the BoE’s monetary policy meeting tomorrow afternoon.

Euro pound exchange rate forecast: BoE in focus

Looking ahead, the BoE’s interest rate decision is due tomorrow, and will likely drive GBP movement in the afternoon. Though the central bank is expected to enact another interest rate hold, any dovish signals could prompt losses in the pound.

Looking to the Eurozone, a lack of immediate data could see EUR trade in a wide range against its rivals.