Pound Euro Exchange Rate News: GBP/EUR Drops as UK CPI Jumps to 40-Year High

May 18, 2022 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Drops as UK CPI Jumps to 40-Year High

GBP/EUR Plummets as UK CPI Reaches Highest Level Since 1982

The Pound Euro (GBP/EUR) exchange rate tumbled at the opening of today’s European session in response to the UK’s latest consumer price index. However, GBP/EUR is beginning to regain some losses as Eurozone’s inflation missed forecasts.

At the time of writing, the GBP/EUR exchange rate is trading at approximately €1.18.

Pound (GBP) Collapses as UK CPI Surges to 40-Year High

The Pound (GBP) is dropping against the majority of its peers this morning following the UK’s latest CPI release.

Marginally missing market forecasts of 9.1%, the UK CPI soared from 7% to 9% in April. This is the highest level of inflation since 1982.

Experts have attributed the high inflation to rising energy bills, driven by the new energy price cap and Russia’s invasion of Ukraine.

This has spooked markets as economists warn the UK may be heading towards a recession.

Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC), said:

‘The scale at which inflation is damaging key drivers of UK output, including consumer spending and business investment, is unprecedented and means there is a real chance the UK will be in recession by the third quarter of the year.’

The BCC has called for UK Chancellor of the Exchequer Rishi Sunak to announce an emergency mini budget.

However, Sunak has stated the UK government ‘cannot protect people completely from these global challenges’.

As a result, GBP exchange rates are likely to stay weak for the remainder of today’s session.

Euro (EUR) Gains in Spite of High Inflation in Eurozone

The Euro (EUR) is rising against the weakened Pound today, though struggling against some of its stronger rivals.

This comes as the Eurozone’s final CPI release for April holds steady at 7.4%.

Although this is slightly down from market expectations of 7.5%, the Eurozone’s CPI remains significantly above the European Central Bank’s (ECB) target rate of 2%. As a result, the ECB has maintained its recent hawkish rhetoric.

Earlier today, ECB policymaker Olli Rehn echoed the bank’s hawkish position, stating:

‘It is my view that it seems necessary that in our policy rates we move relatively quickly out of negative territory and continue our gradual process of monetary policy normalisation.

‘I am not alone, as this is also the indication given by many of my colleagues in the ECB Board and Governing Council.’

This has stoked ECB interest rate hike bets and is providing the single currency with some support, although the slightly lower-than-expected inflation rate reading may be capping gains.

In addition, due to the negative correlation between the Euro and the US Dollar (USD), the single currency’s upside is being capped by a hawkish speech from Fed Chair Jerome Powell.

On Tuesday evening, Powell maintained his hawkish stance, boosting interest rate hike bets for the Fed. In turn, USD strength has subdued the single currency.

GBP/EUR Exchange Rate Forecast: Will Brexit Impact GBP/EUR?

Looking ahead, the Pound Euro exchange rate is likely to be influenced by Brexit developments.

In recent days, the UK government has threatened to unilaterally amend the Northern Ireland protocol. If this occurs, it may cause tension between the UK and the EU and disrupt trade, weakening the GBP/EUR exchange rate.

On the data front, the Pound may be bolstered by the UK’s latest Confederation of British Industry (CBI) industrial trends orders. In May, the CBI’s order book balance is predicted to increase from 14 to 17. If this prints true, it could boost Sterling’s appeal.

Meanwhile, the Euro may be impacted by the European Central Bank’s (ECB) monetary policy meeting accounts.

Should these accounts strike a hawkish tone, it may bolster demand for the single currency.

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TAGS: Pound Euro Forecasts