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Euro Pound (EUR/GBP) Exchange Rate Stumbles as UK Core Inflation Remains Elevated

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Euro Pound (EUR/GBP) Exchange Rate Weakens amid Sticky UK Core CPI

The Euro Pound (EUR/GBP) exchange rate is weakening this morning, as UK core inflation surprised to the upside.

At the time of writing, EUR/GBP is trading at around £0.8564, falling by just under 0.3% from the morning’s opening rates.

Pound (GBP) Rallies as Core Inflation Remains Elevated

The Pound (GBP) is climbing this morning, following the release of the latest consumer price index data.

While headline inflation was found to have cooled significantly to 6.8% over July, core CPI and services inflation showed a different story. The more volatile measures surprised to the upside, indicating sticky core inflation.

With this in mind, GBP investors began to bet on further interest rate hikes from the Bank of England (BoE). The consensus is that a 25bps hike in September is a foregone conclusion.

Thomas Pugh, Economist for RSM UK, commented that:

‘Overall, inflation, especially core and services, is still too high for the MPC to tolerate, which, combined with fast wage growth, means another rate hike is September is a sure bet.

But cooling inflationary pressures means this can be another 25bps hike and that the peak in interest rates is not far off.’

The data comes on the back of yesterday’s record levels of wage growth. The pressure is firmly on the Bank of England to work to drive inflation down, as it continues to remain at the highest level of any G7 territory.

Euro (EUR) Firms amid Surprise Industrial Output Recovery

While the Euro (EUR) is on the backfoot against the Pound, the single currency is managing to ride tailwinds against other peers.

This comes on the back of the latest Eurozone industrial production data, which printed far above forecasts for June. Output was found to have rose by 0.5% over the month, smashing estimates of a 0.1% decline.

With this in mind, the economic outlook for the bloc appears less sombre, prompting EUR investors to bring some support to the single currency. However, a lack of more significant data releases is likely resulting in capped gains for the Euro.

Euro Pound (EUR/GBP) Exchange Rate Forecast: UK Retail Sales in Focus

Looking ahead for the Pound, July’s retail sales data is set for publication on Friday. Economists are forecasting a fall of 0.5%, which could weaken Sterling by indicating further weakness in the sector.

For the Euro, meanwhile, the data calendar continues to be light. Because of this, EUR’s primary driver of movement may be the common currency’s negative correlation to the US Dollar (USD). Tonight, the latest FOMC meeting minutes are due for publication. If the minutes seem hawkish, USD could rise and weaken EUR.

Additionally, the final Eurozone inflation prints for July are scheduled for release on Friday. If they confirm that inflation held over the month, EUR could see modest strength.

Elsewhere, risk appetite is likely to be a driver of movement for EUR/GBP. As a safer currency, a shift to bearish trade would likely boost EUR over the increasingly risk-sensitive Sterling.