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Euro Pound (EUR/GBP) Exchange Rate Rangebound amid Cooling Core Inflation

Euro Pound (EUR/GBP) Exchange Rate Narrows amid Core Inflation Cooldown

The Euro Pound (EUR/GBP) exchange rate is trading narrowly today, as cooling inflation undermines the Euro.

At the time of writing, EUR/GBP is trading at around £0.8796, showing little movement from today’s morning rates.

Euro (EUR) Undermined by Cooling Inflation, Tightening Woes

The Euro (EUR) is being undermined today, following the release of the latest bank lending survey. Conducted by the European Central Bank (ECB), the survey indicated that 38% of banks saw a fall in demand for credit.

The survey indicated that continual interest rate hikes have begun to have a negative impact on borrowing.

The report stated:
‘The decline in net demand was stronger than expected by banks in the previous quarter and the strongest since the global financial crisis. The general level of interest rates was reported as the main driver of reduced loan demand, in an environment of monetary policy tightening.’

This wasn’t helped by today’s inflation data. While headline inflation ticked upward to 7%, core inflation cooled across the Eurozone to 5.6%.

Between cooling core inflation and the increasing impact of tightening, the ECB may pursue a smaller rate hike at the next meeting.

Pound (GBP) Lacks Support amid Manufacturing Decline

The Pound (GBP) is lacking support during today’s session, as a lack of data leaves Sterling vulnerable to domestic pressures.

Today, April’s manufacturing PMI cemented a fall in sector activity over April. While above initial readings, the index printed at 47.9, illustrating a sector in trouble. The accompanying report showed that new export orders had fallen for the 15th consecutive month.

Rob Dobson, Director at S&P Global Market Intelligence, stated:

‘Output and new orders contracted, as manufacturers felt the impacts of client uncertainty, destocking and tightening cost controls. There was no escape from the subdued mood of the market, with both domestic and export customers remaining reticent to commit to new contracts.’

Elsewhere, a mixed market mood is appearing to weigh on the Pound. While some riskier assets are rising, Sterling appears unable to capitalise on any potential. A lean towards bearish trade is the likely cause, due to GBP’s increasingly risk-sensitive nature.

EUR/GBP Exchange Rate Forecast: ECB Interest Rate Decision in Focus

Looking ahead for the Euro, the core catalyst of movement is likely to come on Thursday. Then, the European Central Bank are scheduled to publish their latest interest rate decision.

Economists currently forecast the ECB to pursue a 25bps rate hike, but a 50bps hike is on the table. With inflation printing at the same levels, the bank may pursue the higher hike. If this occurs, EUR could rally.

Beforehand, the latest unemployment rate is scheduled to print. March’s rate for the bloc is forecast to hold at 6.6%, which may increase bets on further tightening.

For the Pound, data releases are relatively thin on the ground in the short term. Because of this, Sterling is likely to be left vulnerable to external factors.

For instance, if the market mood sours, GBP may weaken due to its increasingly risk-sensitive nature. This would allow EUR to gain ground over Sterling.