GBP/EUR exchange rate midweek update: pound bolstered versus euro by UK inflation data
The pound euro (GBP/EUR) exchange rate was boosted by UK inflation data that all but cemented an interest rate hold from the Bank of England on Thursday.
(16/09/2024 to 18/09/2024)
Monday
The pound euro (GBP/EUR) exchange rate traded without a clear direction in the 1.18 mid-range amid a sparsity of economic data from both sides, amplifying renewed concerns surrounding the UK government’s upcoming Autumn Budget.
Speculation is rife that Chancellor Rachel Reeve could introduce a series of sharp tax raises and spending cuts to plug a potential £22bn ‘black hole’ in UK public finances – a drastic move economists think could damage the economy’s foundations and undermine the UK’s long-term fiscal sustainability.
The single currency was kept afloat by its negative trading relationship with a downbeat dollar that was hobbled by the Federal Reserve’s looming policy decision – with a rate cut all but guaranteed. However, its safe-haven status meant its upside potential was tempered by an improving market risk sentiment.
Tuesday
The pound was subdued versus the euro around 1.186, despite waning German economic morale.
The ZEW economic sentiment index for the bloc’s largest economy revealed a sharper-than-expected decline, printing at 3.6 – its lowest level since October 2023 and well short of consensus estimates of 17. This marked the third consecutive monthly drop in optimism, which served to undermine the single currency.
An ongoing UK data lull focused investor attention on the Bank of England’s (BoE) interest rate decision on Thursday.
Wednesday
The pound jumped to within touching distance of the 1.19 benchmark following the publication of the UK’s latest consumer price index.
Headline inflation remained at 2.2% in August, matching the expectations of economists and leaving the door open for the BoE to cut interest rates again this year.
Core inflation, which discounts volatile food and energy prices, was 3.6% last month compared with 3.3% in July.
Services inflation – the BoE’s preferred gauge of inflation – also warmed, rising from 5.2% to 5.6%.
The raft of inflation figures increased expectations of an interest rate hold from the BoE the following day, boosting the pound.
The euro edged lower after the Eurozone’s finalised CPI reading confirmed that headline inflation dipped from 2.6% to 2.2% – a three-year low – while core inflation ticked down from 2.9% to 2.8%. The print prompted investors to ramp up European Central Bank (ECB) interest rate cut bets, denting the euro.
Looking ahead
The BoE is gearing up to leave interest rates on hold on Thursday – a widely expected move that’s almost fully priced in and will likely bolster the pound. Therefore, a surprise rate cut will undermine the UK currency.