Pound Euro (GBP/EUR) Exchange Rate Approaches Yesterday’s Lows as German Inflation Hits 41-Year High

April 28, 2022 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Approaches Yesterday’s Lows as German Inflation Hits 41-Year High

GBP/EUR Exchange Rate Tumbles on German Inflation

The Pound Euro (GBP/EUR) exchange rate is falling this afternoon, as Germany’s preliminary CPI reading buoys the Euro (EUR). Meanwhile, the Pound (GBP) is exposed to losses as risk-off headwinds exert downside in the absence of any significant UK data.

At the time of writing, GBP/EUR is trading at €1.1837, down 0.4% from today’s opening levels.

Euro (EUR) Losses Capped by Inflation Data

While the Euro is firming against the Pound today, the single currency has lost steam against several of its peers on account of risk-off trading and US Dollar (USD) strength. The strong negative correlation between EUR and the ‘Greenback’ means that when the latter strengthens, the Euro often comes under pressure.

Nevertheless, the single currency is enjoying some support from the release of Germany’s annualised inflation data, as a preliminary reading indicates a jump to 7.4%. This is the highest the CPI has been since 1981; the Federal Statistical Office reports that upward pressure came from energy prices, food, and services.

It’s not only Germany in which price pressures are intensifying - firms and households are grappling with mounting costs across the 19-member Eurozone. In response to widespread inflation across the bloc, the European Central Bank (ECB) is expected to raise interest rates in the coming months.

The central bank today issued a mea culpa in response to criticism for having consistently underestimated inflationary pressures. The ECB said it had tried to learn from its mistakes by improving its models, but the fallout from Russia’s invasion of Ukraine and lifting of Covid-19 restrictions made inflation would ‘very challenging to forecast’.

The bank added that the impact of wholesale energy prices on consumer markets had also come through much quicker than expected:

‘The exceptional increase in energy prices was largely unanticipated by market participants…

For electricity, wholesale prices were passed on to consumers almost immediately in some countries, despite this pass-through historically having taken three to twelve months.’

Pound (GBP) Subdued by Ongoing Ukraine Conflict

The Pound (GBP) traded down against many of its peers today, given a low market mood and lack of supportive UK data. The war in Ukraine continues to exert pressure on morale, denting risk-on currencies such as Sterling.

Alongside Russia’s threat to cease gas supplies to European countries, reports from Ukraine suggest that Russian forces are guilty of committing sexual crimes against women in areas of conflict, inviting fresh criticism from the international community.

In response to the ongoing conflict, US President Joe Biden has asked Congress to approve another $20bn in military aid to support Ukraine – despite Russia’s warnings that ‘pumping' Ukraine with weapons will 'threaten European security'.

Meanwhile, the UK’s defence minister has repeated his assertion that it is 'legitimate' for Ukraine to attack logistics targets within Russia.

‘If Ukraine did choose to target logistics infrastructure for the Russian army, that would be legitimate under international law’ said Ben Wallace; ‘It is certainly the case that Britain is assisting and finding artillery for Ukraine, which it is mainly using within Ukraine on Russian forces.’

Eslsewhere, dovish expectations regarding the Bank of England (BoE)’s policy tightening outlook also weigh upon Sterling.

The BoE is widely expected to deliver its fourth consecutive interest rate hike following next week’s policy meeting, but there are significant doubts over whether the bank will pursue any more hikes over the summer, given the UK’s cost-of-living crisis.

GBP/EUR Exchange Rate Forecast: Euro Area Inflation to Boost Single Currency?

Looking ahead, tomorrow’s flash inflation reading for the Euro area is likely to inspire some movement in the Pound Euro exchange rate. If the CPI increased to 7.5% in April, on an annualised basis, the Euro will likely firm on hopes of more aggressive tightening action from the ECB.

GDP data could also affect EUR trading, as both Germany’s and the wider Euro area’s economies are expected to have expanded last quarter. Such a result may lend further support to the single currency.

Regarding the Pound, a lack of significant economic data leaves Sterling to trade on risk sentiment and other external factors. Brexit headwinds may exert some GBP downside, following the UK’s latest decision to delay checks at the border once again.

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