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Euro Pound (EUR/GBP) Exchange Rate Supported by Hawkish ECB

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EUR/GBP Exchange Rate Climbs as Sterling Sentiment Weakens

The Euro Pound (EUR/GBP) exchange rate is ticking up this afternoon as the Euro (EUR) enjoys a boost from hawkish central bank rhetoric. Meanwhile, the Pound (GBP) comes under pressure from persistently high inflation expectations and news from struggling retailers.

At the time of writing, EUR/GBP is trading at €0.8699, up 0.5% from today’s opening levels.

Euro (EUR) Supported by ECB-Speak, Investors Shrug Off Trade Deficit

The Euro has managed to maintain a steady uptrend against the majority of its peers today, supported by a hawkish speech from the European Central Bank (ECB). Further buoying EUR against perceived-riskier peers is a relative risk-off mood.

Balance of trade data for the Euro area came in below expectations this morning, printing at €-34bn rather than the €-26.2bn forecast. Investors were not overly concerned by the swelling deficit, however, as it is widely caused by rising fuel prices.

Measures proposed by the European Commission earlier this week are expected to cap energy costs going forward. Instead, investors have focused upon a hawkish speech from Luis de Guindos this morning, in which the ECB policymaker said:

‘Very high inflation is dampening spending and production… a period of heightened uncertainty is here to stay. Monetary policy needs to walk a fine line to get it right.’

The words of the Vice President imply that central bank rate setters will be continuing to hike interest rates at a fairly aggressive pace, following the example set by the Federal Reserve. The comments of another ECB policymaker also appear to support this view.

Governing Council member Gabriel Makhlouf said today that reducing public debt ‘should remain a key priority as persistent inflation is damaging to economic stability. He also said that raising interest rates is absolutely necessary.

Pound (GBP) Subdued by Retail Losses, Inflation Expectations Ahead

The Pound is struggling against its peers this afternoon as external factors weigh upon the currency amid a lack of significant domestic data.

Early this morning, retail giant John Lewis revealed that it lost £99m in the first half of 2022. This illustrates the impact the cost-of-living crisis is having on all British businesses – not just small ones.

Sharon White, chair of the John Lewis partnership, said:

‘No one could have predicted the scale of the cost-of-living crisis that has materialised… As a business, we have faced unprecedented cost inflation across grocery and general merchandise.’

Further demonstrating the state of affairs in the UK, inflation expectations for the year ahead have hit a record high, according to the Bank of England (BoE)’s quarterly survey. The survey, developed with Ipsos, revealed that public inflation expectations for 2023 reached 4.9%, while net public confidence in the UK’s central bank fell to -7% versus -3% in May.

While the survey failed to take into account new energy support measures to be implemented under the Truss government, it paints an accurate picture of people’s concerns about living standards.

Households suffering the most from the higher cost of groceries and essential services received another blow to morale today. New chancellor Kwasi Kwarteng is reportedly considering scrapping the cap on bankers’ bonuses, angering many.

The General Secretary of the Unite Union commented on this development, saying:

‘Millions are struggling to feed their families and keep the lights on, the government’s priority appears to be boosting the telephone number salaries of their friends in the city.’

EUR/GBP Exchange Rate Forecast: UK Retail Data to Affect Rates?

Into tomorrow’s session, the Euro Pound exchange rate is likely to be affected by the UK’s August retail data. Sales in the UK are forecast to have dropped by 0.5% on a monthly basis, likely weakening support for the Pound.

Elsewhere, the bloc’s finalised inflation reading could affect Euro exchange rates, if it differs from earlier estimates. Inflation is expected to have hit 9.1% in August: if tomorrow’s data prints at or above expectations, EUR will likely firm.