Pound Euro (GBP/EUR) Exchange Rate Boosted by UK Inflation Figures

April 19, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Boosted by UK Inflation Figures

Pound Euro (GBP/EUR) Exchange Rate Climbs after UK Inflation Data

The Pound Euro (GBP/EUR) exchange rate was lifted on Wednesday by better-than-expected UK inflation figures. The pairing was pushed higher by an intensification in bets on a 25bps interest rate hike from the Bank of England (BoE) at their May meeting.

On the other hand, a retreat in global risk appetite kept pressure on GBP/EUR over the course of the day. Evidence of persistently high core inflation in the Eurozone also dent confidence in the exchange rate.

At time of writing the GBP/EUR exchange rate was at around €1.1354, which was up roughly 0.3% from that morning’s opening figures.

At time of writing the GBP/EUR exchange rate was at around €

Pound (GBP) Bolstered by Hotter-Than-Expected March Inflation

The Pound (GBP) rose on Wednesday following the release of the latest inflation data. A pullback in risk appetite limited gains for Sterling, however.

March’s inflation fell by less-than-forecast on Wednesday, declining from 10.4% to 10.1%. Inflation had been expected to ease to 9.8%. Sticky core goods inflation was highlighted as the core reason behind the print. Food and alcoholic drink prices rose by 19.1% in the year to March, with bread and cereal inflation at a record-high.

The hotter-than-expected inflation prompted renewed bets on further interest rate hikes from the Bank of England. Analysts anticipated that a 25bps rate hike from the BoE at their May meeting was now extremely likely.

James Smith, developed markets economist at ING, remained slightly cautious though:

‘In short, it’s not quite a slam dunk for a May rate hike – though markets are fully pricing that outcome now. We agree that it’s now probably more likely than not in light of this week’s inflation and wage data, having up until now forecasted no change. Whether the Bank goes further than that, however, we are less convinced. Markets are pricing three more rate hikes over the next four meetings, which seems extreme.’

Euro (EUR) Firms as Core Inflation Remains Stubbornly High

The Euro (EUR) made subdued gains on Wednesday. EUR benefitted from a cautious market mood, although saw its upward progress capped by a drop in Eurozone inflation.

The final reading of March’s inflation for the Eurozone confirmed a fall to 6.9%, down from February’s 8.5%. Falling energy prices were the primary reason behind the drop in March’s rate.

Core inflationary pressures remains stubbornly high however, with March’s rate climbing to 5.7%. The European Central Bank (ECB) is concerned that the higher energy costs have bled into the trading bloc’s wider economy. The still-high prospects of additional ECB rate hikes kept the Euro buoyed on Wednesday.

Recent hawkish remarks from ECB policymakers also lent support to the Euro. Speaking on Tuesday, ECB Chief Economist Philip Lane signalled his support for further rate hikes.

GBP/EUR Exchange Rate Forecast: Will Continued BoE Rate Hike Bets Bolster Pound?

The Pound will see a range of data releases on Friday. Sterling come under pressure initially if March’s retail sales slip as predicted. Retail sales volumes are set to decline by 0.5% after February’s surprise leap in sales.

On the other hand, forecast strong performance in the UK’s private sectors could help curb any potential losses for GBP. April’s PMIs are expected to indicate a rise in performance across all UK sectors.

Movement in Sterling may also be inspired by the market’s expectations of further action from the BoE. Additional rate hikes from the central bank have been priced in following Wednesday’s inflation data.

For the Euro, a downturn in German PPI could see the single currency reverse its losses. March is expected to see a further drop in inflationary pressures on Thursday. On the other hand, a forecast narrowing in the Eurozone's trade deficit could prop up the single currency,

Also on Thursday, the release of the ECB's monetary policy meeting accounts could restore some confidence in EUR. Markets will be looking for any signs of central bank's forward policy.

Friday's private sector data for the Eurozone could see increased losses for the Euro. April's PMI are expected to show a downturn across all private sectors.

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TAGS: Pound Euro Forecasts