GBP/EUR exchange rate midweek update: pound little moved by stickier-than-expected inflation
The pound managed to weather a stickier-than-forecast UK inflation that cooled BoE rate cut bets.
(15/04/2024 to 17/04/2024)
Monday
The pound euro (GBP/EUR) exchange rate hovered near a four-week high above 1.17 after the single currency was pressured by dovish commentary from the European Central Bank’s (ECB) Chief Economist, Philip Lane.
Following last week’s sixth consecutive interest rate hold from the ECB, accompanying guidance ramped up bets on an interest rate cut in June. Lane fanned the speculation flames by reaffirming the central bank’s data-driven approach and expressing his belief that the ECB’s 2% target inflation rate is within reach.
The ECB rate-setter commented: “We will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, and we are not pre-committing to a particular rate path. Wage pressures are gradually moderating but remain elevated compared to a steady-state benchmark.”
Even the latest industrial production data indicating a marginal recovery in the bloc couldn’t free the euro from the shackles of the Eurozone’s interest rate outlook.
The euro’s negative correlation with the dollar may have soured investor sentiment further following a slight uptick in the US currency.
Tuesday
The pound traversed the 1.17 range against the euro despite the release of influential data from the UK and Eurozone economies.
The UK currency shrugged off the latest unemployment print which showed the domestic jobs market stalled. The jobless rate jumped to 4.2% in February, overshooting expectations of 4%, and rose from an upwardly revised figure of 4% for January.
What’s more, the nation’s latest average earnings (excluding bonuses) print for February also fell short of expectations, coming in at 6%, just below the 6.1% forecast.
The pound’s resilience came ahead of a speech by Bank of England (BoE) Governor Andrew Bailey. Addressing the IMF (International Monetary Fund), Bailey hinted the central bank may be able to cut rates before the Federal Reserve – dovish comments that supported the pound.
The euro was supported by improving morale in the powerhouse German economy. The ZEW economic sentiment index for April printed at 42.9 – the highest reading since February 2022 and well above economists’ expectations of a 35.9 reading.
Wednesday
The pound euro rate was muted a fraction above 1.17 despite a stickier-than-forecast UK inflation print that dulled expectations of multiple UK interest rate cuts this year.
The UK’s annual inflation rate dropped for a second consecutive month in March, falling to 3.2% – the lowest level since September 2021 – but missed forecasts for a bigger decline to 3.1%. The core measure, which discounts volatile elements like energy and food, dipped from 4.5% in February to 4.2% - a fraction higher than the 4.1% forecast.
This prompted investors to reevaluate their policy loosening bets. They are now pricing in just one interest rate cut this year, compared to expectations of five at the start of the year.
Looking ahead
Looking ahead for the pound, retail data due on Friday could be a catalyst for movement. Economists forecast that sales in the sector increased on a monthly basis in March, which could inject strength into the pound.
A data lull in the Eurozone means investor attention will be focused on a string of speeches from ECB officials for clues about the timing of policy unwinding.