GBP to EUR Exchange Rate Plummets as Slowing UK Inflation Knocks Bank of England (BoE) Interest Rate Hike Bets

April 18, 2018 - Written by Minesh Chaudhari

STORY LINK GBP to EUR Exchange Rate Plummets as Slowing UK Inflation Knocks Bank of England (BoE) Interest Rate Hike Bets

Following weeks of solid performance in Sterling, the British Pound to Euro (GBP/EUR) exchange rate plummeted on Wednesday. Pound investors were highly concerned by Britain’s surprisingly slow March inflation rate and Bank of England (BoE) interest rate hike bets fell as markets anticipated further signals from the bank.

Last week saw GBP/EUR put in a solid gain from the level of 1.1466 to 1.1543. On Monday, GBP/EUR touched on a high of 1.1598 – the pair’s best level since May 2017. On Wednesday however, slower UK inflation news caused GBP/EUR to plunge back down to the level of 1.1480.

GBP Tumbles as UK Inflation Weakens Bank of England (BoE) Rate Hike Bets

A surprising slowdown in the UK inflation rate prompted investors to sell the Pound en masse on Wednesday, taking the Pound to Euro exchange rate back to last week’s levels.

Britain’s March Consumer Price Index (CPI) results had been forecast to slip from 0.4% to 0.3% month-on-month, and remain at 2.7% year-on-year.

However, the monthly inflation rate unexpectedly slowed to 0.1% and the yearly rate to 2.5%.

What’s more, Britain’s core inflation rate slowed from 2.4% to 2.3% year-on-year rather than rising to 2.5% as expected. This indicated that UK inflation was being driven more by the Pound’s shifts in value than sustained price pressures.

With UK inflation slower than expected, investors became concerned that the Bank of England (BoE) would be put off hiking UK interest rates in May, despite previously signalling that a May rate hike was likely.

Amid widespread economist expectations that a May rate hike is on the way, most analysts still believe the bank will go ahead with a May rate hike regardless.

According to Andrew Sentance, senior economic adviser from PwC:

‘The Bank of England should not therefore treat this latest fallback in inflation as a dovish signal for interest rate policy. The MPC’s approach has normally been to look through short-term fluctuations and focus on the longer term influences on the inflation outlook. With unemployment at its lowest level since the mid-1970s, continued UK economic growth, a strong global economy, and inflation likely to remain above-target, there is still a very strong case for a rise in interest rates to 0.75% at next month’s MPC meeting.’

Pound investors are now highly anticipating further signals or assurances from the BoE on whether or not a May rate hike is still likely.

EUR Strength Limited as Eurozone Inflation Also Falls Short

The Pound to Euro exchange rate could have fallen even further on Wednesday if the latest Eurozone economic data hadn’t also fallen short of projections.

The Eurozone’s overall March Consumer Price Index (CPI) results were projected to come in at 1.4% year-on-year, but instead only climbed from 1.1% to 1.3%.

Other prints, including the monthly inflation and yearly core inflation stats, met expectations.

With Eurozone inflation falling short of market expectations again, investors have little reason to remain bullish on the Euro. The European Central Bank (ECB) is not expected to shift away from its cautious economic outlook any time soon.

Eurozone construction and economic sentiment results have also disappointed investors this week.

GBP/EUR Forecast: Investors Anticipate Bank of England (BoE) Comments

With UK inflation falling short of forecasts, there is now widespread uncertainty in markets as to whether the Bank of England (BoE) will still hike UK interest rates in May or whether it will have been put off.

While analysts still generally believe the BoE will look through this single dataset and hike UK rates regardless, the Pound may remain jittery unless BoE officials offer fresh signals.

In the coming sessions, Pound investors will be closely watching any speeches or comments from BoE officials.

Thursday evening will see a speech from BoE Deputy Governor Jon Cunliffe. If he makes any statements on whether or not the inflation rate has influenced the bank’s view, this could cause some late-week GBP/EUR adjustments.

Britain’s UK retail sales results from March will be published on Thursday as well, but these are unlikely to be hugely influential with investors focused on UK inflation.

Euro movement could be limited towards the end of the week.

The shared currency is unlikely to notably strengthen against Sterling amid a lack of European Central Bank (ECB) hawkishness, but if Friday’s Eurozone consumer confidence projection impresses it could weaken GBP/EUR slightly.

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TAGS: Pound Euro Forecasts