Euro Pound Exchange Rate Fluctuates as Euro Area Inflation Cools Further
The Euro Pound (EUR/GBP) exchange rate is rangebound after Eurozone inflation cooled for the third consecutive to 5.3%.
At time of writing the EUR/GBP exchange rate is trading around £0.8575, relatively unchanged from this morning’s opening levels.
Euro (EUR) Buoyed by Rate Hike Expectations
The Euro (EUR) is trading with mixed success this morning in the wake of cooling inflation and stronger-than-expected GDP growth.
As investors wait with bated breath over whether the European Central bank (ECB) will opt to pause its tightening cycle in September. Headline CPI in the Euro area slowed to 5.3% in June YoY, the lowest reading since January 2022. With a drastic drop in energy costs, inflation has now eased for the third consecutive month.
However, preventing further losses is that core inflation came in above forecasts and remained unchanged at 5.5%. The figure is now higher than headline CPI for the first time since 2021. With the target rate still some way off, EUR investors are hoping for further tightening, keeping the Euro supported.
Elsewhere, GDP growth came in better than predicted as the Eurozone economy grew 0.6%, surpassing the 0.5% expected. However, it did represent the slowest rate of growth since 2020 amid soaring interest rates and falling real incomes. Bert Colijn, Senior Eurozone Economist for ING, commented on the latest data:
‘Without Ireland, growth would have been halved. Looking through the most volatile components, we argue that the economy has remained broadly stagnant.
‘Judging by the survey data we have so far on the third quarter, the risks are to the downside for the coming quarters.’
Pound (GBP) Underpinned by Rate Hike Bets
Meanwhile, the Pound (GBP) remains fairly quiet today amid a lack of notable data. With the looming interest rate decision from the Bank of England (BoE) on Thursday, investors remain cautiously optimistic over further tightening.
With the central bank poised to hit a fresh 15-year high of interest rates this week, inflation continues to provide the BoE with headaches. However, investors are torn over the size of the hike. Thomas Pugh, economist at RSM UK, thinks a bolder 50bps rate hike could be on the table:
‘The economy is clearly far too hot for the Monetary Policy Committee to relax. Inflation is far from under control and some members of the committee will see value in sending another strong signal to the market.’
Euro Pound Forecast: Tight Eurozone Labour Market to Bolster the Euro?
Looking ahead, the Euro Pound exchange rate could see further movement with the release of the latest jobless rate in the Euro area. An expected unchanged 6.5% could give the ECB further leeway in raising interest rates further.
As for the Pound, aside from the final reading for manufacturing PMIs, another dry calendar could see Sterling supported by rate hike bets.
