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Euro Pound (EUR/GBP) Exchange Rate Firms as UK Living Costs Soar

UK streets with shoppers

EUR/GBP Exchange Rate Rises on High UK Inflation

The Euro Pound (EUR/GBP) exchange rate is climbing so far today, as GBP investors are bearish following the release of May’s annual inflation data. UK CPI peaked at 9.1% on an annualised basis – the highest rate seen since 1982.

At the time of writing, EUR/GBP is trading at £0.8603, up 0.2% from today’s opening levels.

Pound (GBP) Slumps Following May’s CPI Release

The Pound (GBP) is falling against the majority of its peers this morning, as May’s annualised inflation rate rose to 9.1% from 9% last month.

The data is Sterling-negative for several reasons. High inflation increases the likelihood of the Bank of England (BoE) tightening monetary policy, which heightens fears of a recession; the release also highlights the UK’s cost-of-living crisis.

On that issue, the government is facing criticism for not doing more to help those on the lowest incomes.

Chancellor Rishi Sunak has assured the public that the government ‘are using all the tools at [its] disposal to bring inflation down and combat rising prices’, but Joanna Elson, chief executive of the Money Advice Trust, argues that it’s not enough:

‘The package of further support recently announced by the government goes some way towards helping households under pressure. For those on the lowest income, however, urgent action is needed, including significantly raising benefits.’

According to Guardian economics editor Larry Elliott, the message is ‘grim’, as evidence from the Producer Price Index (PPI) suggests there are more price rises to come. The price of goods leaving factories are increasing at an annual rate of 15.7% – up from 14.7% in April and the steepest price rise in 45 years.

Euro (EUR) Trends Up Overall Ahead of Confidence Data

The Euro (EUR) is firming against the majority of its peers at the time of writing, despite a fairly weak market mood.

The single currency may be experiencing tailwinds on account of optimistic comments from the European Central Bank (ECB): ECB researchers report today that the EU economy is unlikely to witness a stagflation scenario similar to the one seen in the 1970s.

Under the central bank’s definition, stagflation occurs when inflation expectations top the ECB’s 2% target while the economy stagnates or contracts —for a duration of two years or more.

This scenario is unlikely, according to the ECB, as most forecasters expect inflation to drop below 2% in the second half of 2023. Furthermore, oil price dependence has diminished since the 1970s, reducing the potential economic impact of oil price shocks.

Upside in the Euro is countered somewhat by dovish forecasts elsewhere. Speculation around the ECB’s fragmentation toll persists, with a lack of clarification on the matter undermining support for EUR.

Meanwhile, the International Energy Agency (IEA) says Europe must prepare for Russia to turn off all gas exports amidst continuing tensions over the country’s invasion of Ukraine.

‘Europe should be ready in case Russian gas is completely cut off,’ says the head of the IEA; ‘The nearer we are coming to winter, the more we understand Russia’s intentions.

I believe [current] cuts are geared towards avoiding Europe filling storage, and increasing Russia’s leverage in the winter months.’

Euro Pound Exchange Rate Forecast: European Data to Affect Trading?

Looking ahead, June’s consumer confidence flash for the Euro area may have some effect upon exchange rates in the single currency. Confidence is expected to have increased upon May’s reading, with economists predicting a result of -20.5 this month.

Elsewhere, risk-off headwinds could lend support to the Euro as the perceived-safer currency in the Euro-Pound exchange rate. Speculation over the implications of the UK’s high inflation rate could also buoy EUR on GBP downside.