GBP EUR Exchange Rate Outlook: UK CPI Inflation Drop Sends Pound Sterling to Euro Higher

Modified: Tuesday, 25 March 2014 15:49 BST - Written by Ben Hughes

STORY LINK GBP EUR Exchange Rate Outlook: UK CPI Inflation Drop Sends Pound Sterling to Euro Higher

Official figures published by the UK Office of National Statistics (ONS) earlier today revealed that the level of UK inflation plunged to 1.7% last month – its lowest level for some four years. This was the second month on the trot that the official gauge of British price rises had registered at below the Bank of England’s 2.0% target, suggesting that domestic inflation is now coming under control following its sharp commodity-driven spike higher of recent years. The Pound euro exchange rate (GBP/EUR) has traded very marginally higher on the news, touching 1.1949 earlier.

The Pound Sterling to Euro exchange rate is trading up +0.2% at 1.19467 GBP/EUR. The Euro to Pound Sterling exchange rate is trading at 0.83705 EUR/GBP.

The ONS credited the continued fall in the price of a gallon of petrol in the UK as the primary factor behind the drop in inflation. The price of black gold has steadily declined since last Autumn. This move lower has comprised part of a larger trend lower for wholesale market prices since 2011. The downward drift for oil has made a significant difference to the UK due to the marked effect which it has had on input prices across the economy. Any product bought in British shops which are delivered by road or rail has a ‘fuel’ element in its cost, meaning that a shift higher or lower in wholesale energy prices has a massive effect.

However, the downward move in oil prices during recent months remains under threat thanks to the situation in Ukraine, where Russia appears to have succeeded in its aim in annexing the disputed region. However, Moscow’s actions have not been without cost. The West has imposed targeted sanctions on prominent Russians, eliciting fears regarding the emergence of a new Cold War. With giant Russian energy firm Gazprom providing a large proportion of continental Europe’s gas and oil, the ultimate reprisal from the Kremlin could be to ‘turn off the taps’. In such an event, the price of wholesale gas and oil would be expected to jump, causing UK inflation to head sharply northwards and forcing the Bank of England to hike UK interest rates sooner rather than later. Bad news from Ukraine could therefore prove to be good news for investors holding Pound Sterling.

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