GBP/EUR exchange rate midweek update: pound slumps against euro amid cooling UK inflation
The pound euro (GBP/EUR) exchange rate plummeted after UK inflation dropped well below the Bank of England's 2% target for the first time since 2021 - increasing the likelihood of further interest rate cuts.
(14/10/2024 to 16/10/2024)
Monday
The pound euro (GBP/EUR) exchange rate was trapped in the 1.19 mid-range amid an absence of macroeconomic indicators from the UK economy.
The single currency was also flat ahead of the European Central Bank’s (ECB) latest interest rate decision on Thursday, with markets largely pricing in another cut.
Tuesday
The pound firmed to within touching distance of 1.20 against the euro following the publication of the UK’s latest jobs report.
The rate of unemployment in the UK fell to 4% in August down from 4.1% - the lowest rate since January. The report also showed a record number of people in work.
However, wage growth recorded another slowdown, with average earnings dropping from 5.1% to 4.9% in August – its slowest pace in over two years. This put a lid on the pound’s gains as investors increased Bank of England (BoE) interest rate cut bets due to the central bank’s focus on wage growth in its battle to bring inflation under control.
The euro was muted following the release of Germany’s latest ZEW economic sentiment survey, which reported a stronger-than-expected improvement in morale in October.
While the index rose from 3.6 to 13.1 and outstripped expectations for a smaller rebound to 10, the reading represented the second lowest so far this year – limiting the single currency’s upside.
Wednesday
The pound euro rate plunged more than 0.5% to around 1.193 following the publication of September’s consumer price index, which reported that UK inflation printed below market forecasts – with headline and core inflation both cooling.
Headline inflation fell more than expected to a three-year low of 1.7% last month, rather than a 1.9% expectation. Core inflation was 3.2%, lower than economists’ expectations of 3.4%, while the rate of services inflation dropped from 5.6% to 4.9%.
The figures paved the way for the BoE to cut interest rates further, prompting the pound to slump in value.
Looking ahead
The latest ECB interest rate decision is scheduled for release on Thursday afternoon, with the central bank’s rate-setters widely expected to vote in favour of another cut – a move that could cause the euro to falter.
UK retail sales data for September hits the headlines on Friday, with sales volumes forecast to decline, which could undermine the pound.