Pound Euro Exchange Rate News: GBP/EUR Wavered as Eurozone Inflation Softened to 6.1%

June 1, 2023 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Wavered as Eurozone Inflation Softened to 6.1%

Euro (EUR) Undermined by Slashed Rate Hike Bets

The Euro (EUR) experienced mixed success on Thursday morning in the wake of softer-than-expected inflation reading for May. The annual Harmonised Index of Consumer Prices (HICP) slipped to 6.1% in May, from 7% in April and below expectations of 6.3%.

The level reached the lowest rate since February 2022 but still far above the European Central Bank’s (ECB) target rate of 2-3%. Driven mainly by a 1.7% drop in energy prices, following a 2.4% increase in April. Furthermore, core inflation also surprised to the downside as it printed at 5.3% against a predicted 5.5%. ING Economist Carsten Brzeski said of the latest inflation data:

‘The European inflation outlook is highly affected by two opposing drivers. Lower-than-expected energy prices due to the warm winter weather are likely to push down headline inflation faster than recent forecasts suggest.
‘On the other hand, recent wage settlements and still decent pipeline pressure in services are likely to keep core inflation high.’

Despite the slowdown in inflation, further tightening is still expected from the ECB. Echoing these sentiments was ECB Vice-President Luis de Guindos as he spoke of further hikes on Thursday. He talked about how the ECB are nearing the end of their aggressive rate hike cycle, but also that the job is not done yet:

‘A big part of the journey has been done but there is still the last stretch. The trend is clearly pointing towards a slowdown but we are still very far away from our inflation target of around 2% in the medium term.’

Pound (GBP) Propped up by Hawkish BoE

Meanwhile, the Pound (GBP) remained fairly supported despite another fall in the manufacturing sector. Elevated interest rate hike expectations could have kept Sterling afloat despite the downturn in factory activity.

Preventing any further gains for Sterling was another month of declining factory activity. Manufacturing PMI in the UK fell to a four-month low as output and new orders declined. Against expectations of 46.9, the final manufacturing PMI came in higher, but still remained in contraction territory. Rob Dobson, Director at S&P Global, said of the latest data:

‘Manufacturers are finding that any potential boost to production from improving supply chains is being completely negated by weak demand, client destocking and a general shift in spending in the UK away from goods to services.’

However, with UK inflation remaining far above the target rate of 2%, the markets are beginning to price in rate hikes beyond the June meeting. With a 25bps increase all but baked in for the next policy meeting, investors are now expecting the Bank of England (BoE) to continue their aggressive hiking cycle and could hit 5.5% by the autumn.

GBP/EUR Exchange Rate Forecast: ECB Meeting Accounts to Boost the Euro?

Looking ahead, the Pound Euro exchange rate could see further movement with the release of the meeting accounts from the policy meeting. Any further hints towards how the ECB plan to rein in inflation could see the Euro climb on elevated rate hike bets.

Meanwhile, the Pound will be left to market sentiment until next week amid a lack of economic data. Prospects of further tightening from the BoE could keep Sterling supported in the meantime.

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TAGS: Pound Euro Forecasts