GBP EUR Rate Slumps -1.2% after UK Inflation Slows

Modified: Tuesday, 18 July 2017 16:35 BST - Written by Toni Johnson

STORY LINK GBP EUR Rate Slumps -1.2% after UK Inflation Slows

In disappointing news for Pound traders, the GBP EUR exchange rate has dropped to a one-week low of 1.1235.

GBP EUR Rate Drops -1.2% on Lower Interest Rate Hike Hopes

This decline is primarily because of trader fears about the next UK interest rate hike. Previous Bank of England (BoE) commentary has implied that a rate hike could occur in the coming months.

In the wake of slowing inflation, however, hopes of a near-term rate hike have been effectively dashed. This has greatly weakened the Pound, having been caused by a slide in inflation.

During June, inflation fell from 2.9% to 2.6%, which has effectively released some pressure on the BoE to act on interest rates.

Providing some in-depth analysis, WisdomTree Research Analyst Nick Leung stated that;

‘Today’s inflation reading is slightly softer than expected, underpinned by a combination of oil price weakness, a stabilising pound and import-cost induced inflationary pressures undermining consumers’ debt-fuelled spending power’.

The official Treasury response was a nondescript affair, which ignored the controversial public sector pay cap and its ramifications;

‘While it is encouraging that inflation was lower this month, we appreciate that some families are concerned about the cost of living.

That’s why we have introduced the National Living Wage, which is helping to boost earnings by £1,400 a year, and why we’ve cut taxes for millions of people to help them keep more of what they earn. We are also increasing our free childcare offer to help 400,000 working parents.’

Keeping his hopes up for a BoE interest rate hike regardless was Calum Bennie of Scottish Friendly;

‘Despite a drop in the headline rate of inflation, many families will still be facing the same relentless pressure to make ends meet. The cost of food, household goods and furniture all became more expensive in June and with wage growth still flat those at the bottom will continue to turn to credit or rapidly deplete savings just to keep food on the table.

As long as this squeeze continues the Bank of England faces a difficult balancing act. While on the one hand raising interest rates may help to combat inflation, on the other it will cause real pain for homeowners who could see the cost of their mortgages rise’.

EUR Advance Comes with Falling GBP and Weaker USD

Euro gains seen today have largely been caused by losses elsewhere. With both the Pound and US Dollar suffering due to poor domestic data, the Euro has been left as the more desirable option.

Direct Eurozone news has shown a slowdown in ZEW surveys of economic confidence, for both Germany and the Eurozone.

Despite this, however, confidence levels remain historically high.

GBP Recovery Possible on Upcoming Retail Sales Stats

The Pound has a chance to recover against the Euro on Thursday, when UK retail sales figures for June come out.

Projections are for a rise in recorded sales across the board, which could push up the Pound’s value.

As well as indicating a stable economy, such a result would also go some way to dispelling fears of slowing economic activity.

In this area, Danske Bank Economist Conor Lambe has gloomily forecast;

‘The latest labour market data showed that the rate of nominal wage growth over the year to March-May 2017 was 2 per cent. Therefore, despite today’s fall in the inflation rate, real wage growth is still in negative territory.

Above target inflation, and the accompanying negative real wage growth, is continuing to squeeze UK consumers and this is likely to be reflected in next week’s preliminary estimate of GDP growth in the second quarter of this year’.

Wednesday morning will see the Eurozone construction output measure for May announced. Annually, a slowdown from 3.2% to 2.9% is forecast, but this may not be enough to trigger a EUR GBP decline.

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TAGS: Pound Euro Forecasts