Pound drops below €1.17 after UK CPI surprise

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The pound-euro (GBP/EUR) exchange rate fell below 1.17 on Wednesday after the latest UK CPI data showed headline inflation remained static, not as much as economists expected. rice field.

GBP/EUR is trading near €1.16439 at the time of writing, down 0.40% from the morning’s opening.

The UK consumer price index (CPI) in May beat expectations for the fourth month in a row. Headline inflation hit 8.7% y/y, beating consensus expectations of 8.4%. Similarly, core inflation stood at 7.1% for him, beating expectations for his 6.8%.

Following the release of the data, Lloyd’s analysts noted that “negative contributions from food, transport and domestic services were offset by positive contributions from clothing and footwear, health, communications, recreation and culture, and restaurants and hotels.” said.

“Our economists and the market expect the Bank of England to raise rates by 25 basis points tomorrow,” he added.

“Both GBPUSD and GBPEUR initially traded 0.2% higher, but quickly bounced back and traded around the pre-data levels of c.1.2760 and c.1.1695, respectively.”

The National Bureau of Statistics said the consumer price index continued to rise, rising 8.7% in the year to May, unchanged from April’s figure. These inflation rates beat economists’ expectations of 8.4% and boosted expectations of further interest rate hikes from the Bank of England.

The pound-euro exchange rate (GBPEUR) softened as growing fears of a UK recession offset heightened expectations of a Bank of England (BoE) rate hike.

bannerThe pound (GBP) came under moderate pressure on Tuesday despite mounting speculation of a rate hike. With the latest inflation data set to be released on Wednesday, sterling investors appear to be sitting on the sidelines ahead of May’s headline CPI release.

The Bank of England (BoE) will then release its latest monetary policy decision. A further 25 basis point hike is all but certain, and the focus will be on how hawkish the Bank of England’s decision will be. With inflation expected to ease to 8.5%, the central bank is unlikely to deter an aggressive rate hike cycle. In particular, core inflation, which excludes all volatile prices such as energy and food, is likely to accelerate again.

But what will keep the pound from rising further is renewed recession fears, with Bloomberg economists warning Britain could slip into a shallow recession if interest rates hit 6%. Inflation has turned out to be persistent, and economists are forecasting a darker outlook for the UK economy, combined with an upward spiral in wages. Bloomberg Economics economist Dan Hanson said:

“Our own view is that pricing is probably overdone. But if this tightening cycle has taught us anything, it is that we should not underestimate the persistence of inflation. The BoE may decide that a deep recession is necessary to prevent inflationary sentiment from taking root in the UK.”

Euro (EUR) Exchange Rate Undermined By Monetary Policy Uncertainty

On the other hand, the euro (EUR) found some support despite the lack of economic data. Debate has begun to shift to whether the European Central Bank (ECB) will raise interest rates in September, as hopes of another rate hike in at least July grow.

ECB President Christine Lagarde has strongly signaled further tightening after the ECB hiked rates by another 25bps at last week’s Governing Council meeting. Since then, many ECB policymakers have released hawkish comments, giving the euro moderate support.

But economists at Commerzbank warn that the rate hike bets may slow down.

“It’s no surprise that hawks are quite vocal about a rate hike in September, while doves are trying to dampen expectations.

“At least if economic data points to a easing in price pressures to a greater or lesser degree, doves may make increasingly cautious comments, which may limit the euro’s upside for now. “

GBP/EUR Forecast: Further Inflation Cooling to Support Pound?

Going forward, the pound-euro rate may fluctuate further depending on the latest UK inflation data. Expecting headline CPI to ease to 8.5% is unlikely for the central bank to break out of its aggressive rate hike cycle as interest rates are still well above its 2% target level. But a slower-than-expected inflation rate could dampen expectations that the central bank will continue to raise rates beyond its June meeting.

On the other hand, more talks by ECB policymakers could lead to some movement in the euro. ECB Deputy Governor Luis De Guindos is set to meet later on Tuesday, but if he repeats his hawkish rhetoric, it could boost expectations of rate hikes and push the euro higher.

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