Euro Pound (EUR/GBP) Exchange Rate Wavers as UK Inflation Falls to 8.7%
The Euro Pound (EUR/GBP) exchange rate traded in a narrow range as inflation in the UK printed hotter than expected at 8.7%.
At time of writing, the EUR/GBP exchange rate is around £0.8684, relatively unchanged from this morning’s opening levels.
Pound (GBP) Supported by Elevated Rate Hike Bets
The Pound (GBP) is trading with mixed success this morning in the wake of the latest inflation reading. The Office for National Statistics (ONS) revealed that headline CPI in the UK declined drastically to 8.7%, missing expectations of further softening.
The latest reading still marked the steepest decline in CPI since the beginning of the cost-of-living crisis. It was also the first time inflation fell below double digits since August 2022. With energy prices finally subsiding, electricity and gas prices contributed 1.4% to the decline. However, offsetting the drop was an ever-increasing food prices. In the 12 months to April, food and non-alcoholic drinks prices soared by 19%. It was the fastest pace of growth since 1977. Grant Fitzner, ONS Chief Economist, said of the latest inflation:
‘Prices in general remain substantially higher than they were this time last year, with annual food price inflation near historic highs.’
But despite a substantial slip of inflation, elevated rate hike bets from the Bank of England (BoE) are keeping Sterling supported. With headline CPI still far above the 2% target rate, markets have priced in a 100% probability of the central bank hiking once again at the next meeting in June. Paul Dales, Chief UK Economist, said of the latest data:
‘With inflation proving stickier than the Bank expected, it now seems all but certain that the Bank will raise interest rates from 4.50% to 4.75% in June and perhaps a bit further in the months after.’
Euro (EUR) Undermined by Tumbling Business Confidence
Meanwhile, the Euro (EUR) also struggled for demand amid a lack of major economic data. The latest Ifo business climate indicator highlighted flagging sentiment in Europe’s largest economy. The survey fell for the first time since October as deteriorating industry expectations and falling new orders sapped confidence.
The Ifo also expect the German economy to stagnate in the second quarter of this year, as German businesses are becoming more pessimistic. Klaus Wohlrabe, economist for Ifo, said of the situation:
‘(The) German economy is treading water. Strong collapse in expectations in industry is striking, (and) industry export expectations have fallen markedly.’
However, the Euro remains modestly supported by expectations of further interest rate hikes from the European Central Bank (ECB). With inflation remaining above the central bank’s target, coupled with a maintained hawkish rhetoric from ECB policymakers, EUR investors are confident of further hikes.
Euro Pound Exchange Rate Forecast: Hawkish Lagarde to Boost the Euro?
Looking ahead, the Euro Pound exchange rate could see further movement with a speech from ECB President Christine Lagarde. If she strikes a familiar hawkish tone, the Euro could climb on elevated interest rate hike bets.
Meanwhile, the Pound could be left to market sentiment as investors continue to digest the latest inflation data. BoE Governor Andrew Bailey is expected to be interviewed later today, centred around ‘inflation and the economy’, which could contain hints at the BoE’s monetary policy moving forward.
