High UK Inflation Bolsters Hopes for May Rate Hike – GBP Exchange Rates Surge
The Euro Pound (EUR/GBP) exchange rate slipped on Tuesday, falling as markets responded to the latest UK consumer price index (CPI) report and the building case for an earlier-than-expected rate hike from the Bank of England (BoE).
British consumer price inflation printed at 3% in January 2018, consistent with the previous period but above the market expectations of a slip to 2.9%.
Perhaps more significant, however, was the UK’s annual core inflation reading, which increased to a surprising 2.7%, beating December’s 2.5% and the forecast of a rise to 2.6%.
This increase was largely driven by a rise in prices for recreation and culture (with zoo’s and gardens, funnily enough, supporting the figure).
Beyond this, an accelerated rise in UK consumer price growth ticks one of the Monetary Policy Committee’s (MPC) boxes for a sooner-than-expected rate hike, with the other primary factor being demonstrable progress on the Brexit transition front.
Economist Lucy O’Carrol from Aberdeen Standard Investments shared her thoughts on the readings:
‘Even if inflation drops back a bit further from here, it looks likely to settle at a higher level than the Bank of England feels comfortable with. It will also mean slightly higher interest rates than we’ve been used to’.
This outlook drove demand for Sterling higher.
Euro (EUR) Exchange Rates Limited by German Coalition Concerns
Euro (EUR) exchange rates found some support on Tuesday as investors responded to a recovery in the stock market and the ensuing loss of market appetite for ‘safe-haven’ currencies – though this proved insufficient in bolstering the Euro in the wake of ongoing German coalition concerns.
Martin Schulz’s Social Democrats (SPD) aren’t the only ones to be disgruntled with the coalition deal, with Chancellor Angela Merkel’s Conservatives (CDU) now voicing anger at Merkel for her concession of key positions in the Finance Ministry, Foreign Ministry and the Ministry of Labour and Social Affairs.
Many have claimed that these compromises are a desperate trade on Merkel’s part for an extension of her leadership, with one long-term party member complaining that he saw ‘no good reason at all’ for Merkel sacrificing so many key positions.
Paul Ziemiak, Head of the party’s youth wing reflected this sentiment, stating that he had not heard a single positive comment regarding the negotiation results from members of the CDU.
Beyond all of this, it would seem that Martin Schulz stepping down as leader of the SPD has caused further controversy, with Andrea Nahles now facing opposition for the position from Simone Lange, the SPD Mayor of the German town of Flensburg.
It is possible that this intra-party chaos could endanger the looming coalition vote within the SPD, a prospect that could leave Germany returning to the polls and the Euro tumbling in the face of uncertainty.
EUR/GBP Exchange Rate Forecast: Volatility Likely on Eurozone Growth Figures
The Euro Pound (EUR/GBP) exchange rate could encounter some volatility on Wednesday as markets react to the latest run of Eurozone growth readings.
Analysts currently expect the Eurozone’s Q4 year-on-year reading to hold steady at 2.7%, with the quarter-on-quarter reading to remain at 0.6%, though a print above this would make investors even more optimistic regarding the bloc’s economic outlook.
In other news Wednesday will feature the Eurozone’s industrial production reading, with a rise forecast in December year-on-year from 3.2% to 4.2%.
With tomorrow also featuring the US inflation readings, however, it is quite likely that markets will be bearish until their release (at 13:30GMT), with an upbeat score liable to undermine the Euro and continue to put pressure on the EUR/GBP exchange rate.