GBP/EUR exchange rate midweek update: pound rises against euro following warmer-than-forecast UK inflation data
The pound euro (GBP/EUR) exchange rate neared a two-year high amid sticky UK inflation and diminishing rate cut expectations.
(15/07/2024 to 17/07/2024)
Monday
The pound euro (GBP/EUR) exchange rate traded sideways following the publication of industrial production data from the Eurozone.
In May 2024, compared with April 2024, seasonally adjusted industrial output dropped by 0.6% in the bloc, beating an expected decline of 1%. Despite the above forecast print, it still came in at a three-month low, indicating some weakness in the manufacturing sector.
Political uncertainty in France, where a hung parliament has stoked concerns of gridlock in parliament, continued to deter investors from the euro.
The pound, which hit a multi-week high last week, remained afloat despite an absence of market-moving UK data.
Tuesday
The pound euro rate continued to tread water a whisker below 1.19 ahead of key inflation data on Wednesday amid speculation of an August rate cut from the Bank of England (BoE).
A sparse UK data docket left the pound exposed cooling UK grocery inflation. According to market research company Kantar, grocery prices dropped to a near three-year low of 1.6%.
The euro shrugged off a worse-than-forecast economic outlook in Germany to remain rangebound.
Investor morale in the Eurozone’s largest economy deteriorated more than expected in July, posting its first fall in a year and indicating the German economic recovery will be bumpy.
The ZEW economic sentiment index dipped sharply to 41.8 points – its lowest level in four months – from 47.5 points in June, falling short of the forecast reading of 42.3.
The single currency’s downward potential was cushioned by recent dollar weakness, due to its negative correlation with the US currency.
Wednesday
The pound rose to near a two-year high versus the euro after official data showed UK inflation held steady, defying expectations of a further dip.
The warmer-than-forecast UK consumer price index showed that headline inflation – the government’s preferred measure of the cost of living – remained at its 2% target for a second month in a row in June, rather than easing further to 1.9% as forecast.
This led investors to pare back expectations of an interest rate cut in August. Before the CPI was published, they were almost 50-50; now the probability of a cut is seen at 36%.
Core inflation – which excludes food, energy, alcoholic drinks and tobacco – remained at 3.5%. Inflation in the services sector – closely watched by the BoE – remained at 5.7%, higher than the 5.1% forecast by the central bank. Stubborn services sector inflation poured more cold water on August rate cut expectations, lifting the pound euro rate to around 1.192.
The euro was subdued amid cooling inflation in the bloc.
Eurozone inflation crept lower, coming in at 2.5% last month, easing marginally from May’s reading of 2.6%. The print comes ahead of the European Central Bank’s (ECB) imminent policy decision.
Looking ahead
The UK’s latest employment data hits the headlines on Thursday. Unemployment is expected to remain at 4.4% in May, near multi-year highs. Additionally, the latest wage data could inject volatility into the pound.
The ECB is set to leave interest rates unchanged following the conclusion of its July policy meeting on Thursday after announcing a cut in June from 4% to 3.75%. Investors will monitor the central bank’s accompanying commentary for hints about the timings of its policy loosening timeline.