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Slowing UK Inflation Leaves Pound to Euro (GBP/EUR) Exchange Rate Tight

GBP/EUR Exchange Rate Close on Mixed Reception to UK Inflation Stats

The Pound has traded in a narrow range against the Euro (GBP/EUR) today, following the news that UK inflation slowed in December 2017.

Year-on-year inflation slowed from 3.1% to 3%, while the core annual reading showed a larger-than-expected slowdown from 2.7% to 2.5%.

At 3%, total inflation remains 0.5% above the current pace of UK wage growth with bonuses, and 0.8% above wage growth excluding bonuses.

This means that UK real incomes are still declining, as a symptom of the ongoing national wage squeeze.

Pound traders remain uncertain about the future, as while conditions have improved slightly for UK consumers, a Bank of England (BoE) interest rate hike is now less likely.

Slowing UK Inflation Blamed on Weak Pound, Forecasters Predict Further Rate Reduction

Looking in detail at the inflation rate figures, Nancy Curtin of Close Brothers Asset Management has identified Brexit as a reason behind lower inflation;

‘The Brexit vote brought with it the side effect of depreciating Sterling, pushing inflation well beyond the BoE’s target.

These effects are dissipating somewhat, and core inflation remains lower still’.

Looking further ahead, Ben Brettell of Hargreaves Lansdown has forecast that UK inflation might continue on its downwards path;

‘All this has implications for interest rates. Given the continued headwind posed by Brexit uncertainty, I don’t see why the BoE would rush to raise rates again this year.

I see last year’s quarter point move as more of a tacit admission that the cut to 0.25% was unnecessary.

I’d be somewhat surprised if rates were higher than 0.75% by the end of the year’.

For context, current BoE interest rates are 0.50%, following a rate hike in November 2017.

Euro to Pound Exchange Rate (EUR/GBP) Fluctuates after Mixed German Inflation Data

As with the UK, the Eurozone has also been releasing high-impact inflation rate data recently.

Finalised German inflation figures for December have shown a decline on the year, but a rise from 0.3% to 0.6% on the month.

This has unsettled Euro traders, who remain unsure about whether this data will spur the European Central Bank (ECB) into considering an interest rate hike.

This has resulted in the Euro trading tightly against the Pound, falling against the US Dollar and rising by 0.5% against the Indian Rupee.

Pound to Euro Forecast: GBP/EUR Exchange Rate could Rise on UK Sales Stats

The week’s last notable UK data will be out on Friday morning, consisting of retail sales figures for December.

Estimates are for moderate growth for the year-on-year readings, but negative month-on-month figures.

If the annual figures show growth, the Pound could appreciate because these are considered more high impact than monthly readings.

December would normally be a strong month for reported sales, given the glut of Christmas spending.

Sticking with inflation in the Eurozone, figures for the whole currency bloc will be out on Wednesday morning.

Estimates are for a year-on-year slowdown, which could devalue the Euro.

The European Central Bank (ECB) has a target of 2% inflation, so a move away from this figure will accordingly reduce the odds of an imminent interest rate hike.