Pound to Euro Rate Surrenders 1-Week Highs as Sterling Dips

August 15, 2024 - Written by John Cameron

STORY LINK Pound to Euro Rate Surrenders 1-Week Highs as Sterling Dips

After a strong performance on Tuesday, the Pound lost ground after the latest UK inflation data with the slightly lower than expected print increasing expectations of a further near-term Bank of England (BoE) interest rate cut.

The Pound to Euro (GBP/EUR) exchange rate dipped to near 1.1670 from 1.1700 and after hitting 1-week highs at 1.1715 on Tuesday.

ING commented; “All in all, this morning’s inflation figures still help our EUR/GBP bullish call, and we continue to see the pair as a preferable channel to play BoE-related GBP weakness as opposed to GBP/USD, where some dollar softness can still offer support. A return above 0.860 in EUR/GBP looks warranted.” (GBP/EUR below 1.1630).

There will be further volatility after Wednesday’s US inflation data with the Pound likely to benefit if there is a benign print.

The headline UK annual inflation rate increased to 2.2% from 2.0%, although slightly below consensus forecasts of 2.3%.

The core rate declined to 3.3% from 3.5% and slightly below expectations of 3.4%.

ONS chief economist Grant Fitzner commented; “Inflation ticked up a little in July as although domestic energy costs fell, they fell by less than a year ago. This was partially offset by hotel costs, which fell in July after strong growth in June.”

Input prices data was mixed. He added; “Meanwhile, raw materials prices picked up for the first time in over a year, driven by smaller falls in gas and electricity costs.”

The goods inflation rate increased to -0.6% from -1.4% previously while the services-sector rate declined to 5.2% from 5.7%.

Following the data, markets priced in around a 45% chance of a further BoE rate cut at the September meeting and two cuts expected by the end of 2024.

Pierre Roke, associate at Validus Risk Management, expects further BoE action; “Today’s 5.2% print vs 5.5% expected print validates the more dovish committee members and potentially leaving room for not just one more cut this year but two.”

NIESR associate economist Monica George Michail, commented on the data; “underlying inflationary dynamics continued to slow with core inflation at 3.3 per cent and services inflation at 5.2 per cent.”

She added; “Despite the lower figures, these remain elevated and may lead the Bank of England to exercise some caution with regards to further interest rate cuts.”

Aaron Hussein, global market strategist at J.P. Morgan Asset Management was also more cautious due to the overall growth, labour-market and inflation data.

He added; “We therefore think it’s unlikely that the Bank will follow up its August cut with a cut in September. Absent any material shock to growth, this cutting cycle is likely to be gradual with a quarterly cadence most likely. Investors banking on imminent rate cuts will therefore be disappointed.”

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TAGS: Pound Sterling Forecasts