Pound Euro (GBP/EUR) Exchange Rate Holds Steady as US Inflation Beats Expectations

February 14, 2018 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Holds Steady as US Inflation Beats Expectations

US Inflation Smashes Forecasts – GBP/EUR Exchange Rate Gains Support

The Pound Euro (GBP/EUR) exchange rate proved resilient on Wednesday, capitalising on the highly anticipated US inflation readings and the drop in demand for the Euro that ensued.

The year-on-year US consumer price index (CPI) reading printed at 2.1% in January, consistent with the previous period but above the market forecast of a dip to 1.9%.

The core reading (excluding food and energy) also held steady with a print of 1.8%, beating the forecast of a drop to 1.7%.

This is a welcome sign for the US economy, with wages and prices having stood mostly stagnant for the years following the Great Recession.

It also means that the US Federal Reserve could move to raise interest rates faster than expected this year, with the latest price data also building a case for a rate hike as early as March.

‘I think this does cement the four rate hikes, given the inflation backdrop’, said Jeffrey Cleveland, Chief Economist at Payden & Rygel, continuing: ‘(The hot inflation) helps the Fed tell their story that the Fed has to move up the funds rate in anticipation of higher inflation because inflation moves without lag’.

This rocketed rate hike bets to 80.3% in March, up from Tuesday’s 76.1%, and temporarily siphoned demand away from the single currency.

IMF Report Highlights Poor UK Productivity – Pound (GBP) Exchange Rates Limited

The Pound’s upward potential was limited on Wednesday by the release of the International Monetary Fund’s (IMF) latest country report – a rather gloomy assessment which underlined the UK’s poor productivity.

The IMF stated once again that the British economy has suffered on the back of Sterling’s devaluation and the ongoing Brexit-related uncertainty - particularly with business investment stifled until a greater degree of clarity is available regarding the UK’s future relationship with the EU post-Brexit.

The assessment asserted that the UK needs to build more properties, improve the quality of infrastructure and invest in research in order to become more competitive in the face of any potential Brexit-related encumbrances.

It should also be stressed, however, that the report claimed that very little is currently known about the consequences of Brexit, and very little will be known for many years to come.

Nonetheless, this news kept the Pound pinned.

In other news the Bank of England’s (BoE) latest regional agents’ report revealed that businesses expect pay rises to grow by 3.1% this year, up from 2017’s 2.6%.

This news took a back-seat to the IMF report, however, failing to provide much in the form of support for Sterling.

GBP/EUR Exchange Rate Forecast: Euro Liable to Extend Lead on Widening Bloc Trade Surplus

The Euro found support on Wednesday on news that the bloc’s yearly growth rate printed at a 10-year high of 2.5% in 2017 - and this could extend into Thursday as markets react to the Eurozone’s trade balance figures.

Forecasts currently point to a dramatic widening in the bloc’s December trade surplus, an event that the European Central Bank (ECB) will factor in in their assessment of future monetary policy measures.

In respect to the UK, lacking much in the form of pertinent domestic data releases markets will instead focus on any Brexit-related soundbites, with demonstrable progress liable to bolster Sterling and an ongoing deadlock liable to put GBP/EUR under fresh pressure.

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TAGS: Pound Euro Forecasts